What SVB’s did right: A Treasurer’s viewpoint

What SVB’s did right: A Treasurer’s viewpoint

Critics have suggested that the failure of Silicon Valley Bank (SVB) was caused by its exemption from the 2018 law tailoring regulation, which exempts banks under $250 billion from the liquidity coverage ratio (LCR) rule. However, this claim is unfounded, as SVB would likely have received a passing score on the LCR. The LCR requires banks to hold sufficient high-quality liquid assets (HQLA) to meet net cash outflows under stress. Smaller institutions like SVB have relaxed stress assumptions, with projected cash outflows multiplied by 70 percent.

SVB's LCR as of 31 Dec 2022 would have been 150 percent, exceeding the minimum required LCR of 100 percent. However, SVB's failure was not due to the lack of LCR compliance. Two possible reasons why SVB could not withstand the run it experienced despite being subject to the LCR are:

Firstly, the quality of SVB's customer deposits, which mostly come from startup and tech companies with large cash balances. These companies are heavily influenced and funded by a small group of venture capitalists, which makes them more susceptible to withdrawing money quickly. During the run, SVB reportedly had $42 billion outflows in a day, and most of its deposits were uninsured or above $250,000.

Secondly, to offset its deposit costs, SVB adjusted its HQLA by increasing its holding with longer-term treasury securities and Ginnie Maes, which increased its excessive interest rate risk. With the rising interest rate and increasing cash outflows, SVB had to sell its treasury securities at a loss, directly impacting its capital health and creditworthiness. This reduced SVB's capability to operate and fulfill its obligation to its deposit customers.

In conclusion, SVB's failure appears to reflect primarily a failure of management, supervision, and its business model, rather than its exemption from the LCR. Holding expensive, uninsured significant size deposits from startup and tech companies created a big risk for SVB, and this situation pushed SVB to take significant interest rate risk that resulted in large losses when the interest rate increased. Even if SVB had been required to maintain more level 1 HQLA to prepare for a run, that HQLA would likely have been longer-term Treasury securities to offset the deposit costs, adding further to SVB's troubles rather than solving them.