The Failure of Silicon Valley Bank: Journal Article by Andrew Metrick

Financial and Market Environment

The failure of Silicon Valley Bank (SVB) in March 2023 occurred amid a rising interest rate environment triggered by the Federal Reserve’s efforts to control inflation. SVB had invested heavily in long-term securities, which lost market value as interest rates increased. This, combined with withdrawals by depositors within the technology startup sector, created liquidity challenges. SVB’s announcement of asset sales at a loss sparked a rapid bank run, causing a sudden collapse that echoed the financial stresses seen in the 2008 crisis.

Regulatory and Supervisory Context

SVB’s collapse highlighted significant shortcomings in regulatory oversight and risk management practices. The Federal Reserve was SVB’s primary regulator but was criticized for not fully appreciating the bank’s vulnerabilities as it grew. The Fed’s supervision was further weakened by deregulation from the 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act, resulting in less stringent oversight of mid-sized banks like SVB. Reviews found that SVB’s board failed in risk management and that regulators were slow to address emerging problems, contributing to the bank's sudden insolvency.

Economic Impact and Industry Repercussions

SVB’s failure caused immediate shocks in the tech startup ecosystem, as many companies had uninsured deposits frozen during the bank’s closure. Though experts did not see the collapse as posing systemic financial risk, the event triggered widespread concern over liquidity risks and banking practices in specialized financial institutions. It also prompted federal regulators to guarantee all uninsured deposits temporarily to restore market confidence and prevent contagion to other vulnerable banks, including Signature Bank. The collapse intensified debates on banking regulation and risk management reforms.

Key themes

• The proximate cause of SVB’s failure was its inadequate hedging of interest-rate risk.
• SVB’s collapse revealed broader vulnerabilities in the U.S. banking system.
• The panic spread rapidly, affecting other banks like Signature Bank and First Republic Bank.
• The case illustrates fundamental banking economics and dynamics of banking crises.
• Government intervention played a critical role in containing the panic.
• SVB’s failure serves as an ideal teaching tool for understanding financial crises.

Motifs & problems

The paper recurrently uses the motif of risk and fragility, especially emphasizing SVB’s “risk curve” position with high uninsured deposits, which symbolizes inherent vulnerability within modern banking structures. Another recurring image involves the balance sheet’s eroding value due to rising interest rates, which acts as an interpretive crux highlighting how seemingly standard banking activities can lead to collapse under certain conditions. The panic contagion motif illustrates how interconnectedness amplifies financial instability and complicates regulatory responses, framing SVB’s failure as both an individual and systemic problem.

Study questions

• What were the key risk management failures that led to SVB’s collapse?
• How did SVB's depositor base contribute to its instability?
• In what ways did government action affect the outcome of the panic?
• How does SVB’s failure compare to earlier banking crises?
• What lessons does the SVB case offer for future banking regulation?
• Why is SVB considered a useful teaching case for banking crises?
• How did the rise in interest rates affect SVB’s asset values?
• What systemic weaknesses did the SVB failure expose?

Critical approaches & debates

Scholars analyzing Andrew Metrick’s article utilize a variety of economic and financial lenses, primarily examining systemic banking risks and regulatory failures. Most readings adopt a formalist or institutionalist approach, focusing on the mechanics of banking crises, interest rate risk, and market panic dynamics. Some debate centers on the degree to which regulatory frameworks or bank management decisions contributed to the failure. Disagreements arise over interpretations of the timing and impact of loss realization on depositor confidence, with some emphasizing structural vulnerabilities and others highlighting information asymmetry and market psychology driving the panic. Feminist or postcolonial perspectives are largely absent given the technical, economic focus of the paper.

Key passages

A pivotal passage details the March 8, 2023 announcement by SVB that it realized a $1.8 billion loss from selling securities and planned a $2.25 billion equity raise. This moment marked a shift as losses became “realized,” undermining depositor confidence and triggering panic. Metrick uses this to show how reported losses transform latent vulnerabilities into crisis, illustrating how disclosure and market reaction interact critically in banking failure dynamics.

Bibliography

Metrick, Andrew. 2024. “The Failure of Silicon Valley Bank and the Panic of 2023.” Journal of Economic Perspectives 38 (1): 133–152. DOI: 10.1257/jep.38.1.133. Foundational studies on banking crises and interest rate risk include DeMarzo, Krishnamurthy & Nagel (2024) on “Interest Rate Risk in Banking,” and Laeven, Götz & Levine (2020) on bank equity issuance impediments. These materials provide context for Metrick’s economic analysis and crisis explanation.