SVB were an attractive bank to startups and participants in the tech community. Money was parked with them and SVB invested it in safe assets including government bonds.

As 2022 progressed the start up community was have its own fund squeeze and SVB customers made larger than expected withdrawal requests (larger than expected by SVB funds managers).

SVB had to go to the market and without conditions or other rules in place had to liquidate bonds to make good on the customer withdrawal requests.

Fed tightening policies resulted in higher interest rates which in bond market language is funded by lower bond prices. In short the SVB bond sales were made at a lost totalling $1.8bn in recent weeks. That $1.8bn loss is a financial loss to SVB while they keep customers whole (more on the rules and conditions behind that later.

Looking at the offering on SVB web site my immediate banker reaction is one of

• lending long ( to Government and Bond issuers and holding their bonds as collateral, earning interest rates which are fixed at maturity but the increase in interest rates reduced their asset value)
  and
• borrowing short (creating balance sheet liabilities through customer deposits with immediate liquidity available, while paying customers rates based on rates at maturity).
  

Summary from Bloomberg

SVB took in tens of billions of dollars from its venture capital clients and then, confident that rates would stay steady, plowed that cash into longer-term bonds.

In doing so, it created — and walked straight into — a trap.

Becker and other leaders of the Santa Clara-based institution, the second-largest US bank failure in history behind Washington Mutual in 2008, will have to reckon with why they didn’t protect it from the risks of gorging on young tech ventures’ unstable deposits and from interest-rate increases on the asset side.

Conclusion:

SVB was caught in a classic liquidity trap being asked to repay customer deposits while the supporting asset values (bonds) were reducing in value commensurate with the rate increases.

This liquidity trap is banking 101 a could or should have been caught by the SVB funds managers and reported to executive but that clearly did not happen.

The result: SVB is caught in a bank run.

Regulator miss: Banking prudence and operating at dollar levels too large relative to their balance sheet size are at the root of their problem. Stress tests should capture that risk.