SVB, Silvergate Collapse Turns Spotlight on Deposit Concentration

The sudden collapses of Silicon Valley Bank and Silvergate Bank will likely drive regulators to scrutinize how current rules on banks’ customer concentration and liquidity risks can better protect smaller banks.

But the banks’ unique business models would mitigate concerns that there’s a wider crisis looming, bank industry watchers say. Their circumstances also underscore that industry risk rules aren’t crafted as catch-all solutions, particularly for institutions that are at the whim of a few clients, they say.

Both federal and state regulators “are going to look at liquidity risk, concentration in sectors, and come up with a comprehensive reason why these banks were so exposed,” said Nathan Dean, a Bloomberg Intelligence analyst.

Silvergate catered largely to cryptocurrency companies, including failed exchange FTX, and voluntarily wound down its operations on March 8. Silicon Valley Bank, which served tech startups and their founders, was placed into Federal Deposit Insurance Corp. receivership Friday after prominent venture capitalists told customers to pull their deposits out of the bank.

The two banks failed for different reasons. But they shared some characteristics – excessive concentration in specific industries and a lack of liquidity as the value of their securities holdings plummeted.

Silvergate’s demise was the result of a straightforward bet on cryptocurrencies, particularly large deposits and other business from crypto exchanges. FTX was one of the bank’s largest customers.

Silicon Valley Bank didn’t bet heavy on crypto, but it mostly served tech startups in the region. It was hit with a wave of requests for cash when Peter Thiel’s Founders Fund advised its portfolio companies—including through Twitter—to take their money out of SVB. Other venture capital funds reportedly followed suit.

The bank couldn’t meet the withdrawal requests in part because the value of their securities portfolio was down dramatically.

Around 97% of SVB’s $175.4 billion in total deposits at the time of its collapse were larger than $250,000 apiece, the maximum amount that the FDIC insures, according to the bank regulator.

The failure of both banks highlighted concentration and liquidity risks, said Mayra Rodríguez Valladarez, the managing principal of consultancy MRV Associates and a former Federal Reserve Bank of New York staffer.

“They were concentrated both in assets, and they were concentrated in liabilities,” she said.

Bank supervisors already monitor institutions for concentration and liquidity risks, and larger banks must meet liquidity requirements.

But smaller banks play by different rules. SVB only had $209 billion in total assets as of Dec. 31, according to the FDIC. That’s well below the $250 billion asset threshold upon which banks are subject to enhanced capital and liquidity requirements.

Silvergate was even smaller, with around $11 billion in total assets at the end of 2022.

The banks’ failures may drive regulators to make sure that smaller banks are better protected against a sudden run by having more high quality, liquid assets they can sell to meet withdrawal demands, said Todd Phillips, an independent consultant and former FDIC official.

“Given that this run really seemed to have happened in large part because of information on Twitter, it’s difficult to say information on Twitter won’t affect another bank,” Phillips said of SVB.

Stay the Course?

A few banks with similar profiles to Silicon Valley Bank—First Republic and Signature Banks— saw steep stock drops Friday. But so far, there’s been little evidence of a wider crisis within the banking system as of late Friday afternoon.

Treasury Secretary Janet Yellen met with federal banking regulators Friday and “expressed full confidence in banking regulators to take appropriate actions in response and noted that the banking system remains resilient and regulators have effective tools to address this type of event,” according to readout provided by the Treasury Department.

“The risk concentrations at a small number of banks due to their crypto business model should not have an impact on large banks that have proven to be well-capitalized, have diversified operations and businesses, and have strong liquidity risk management,” said Peter Dugas, an executive director at financial services consultancy Capco.

Regulators may point to the so-far limited fallout from SVB and Silvergate’s failures to conclude that new or tightened rules may not be needed, said Sarah Jane Hughes, a professor at Indiana University’s Maurer School of Law.

“If there is no particular contagion, then I think they might not change very much,” she said.