In March 2023, a bank run unfolded at a speed never seen before. Using smartphones and social media, depositors pulled tens of billions of dollars from Silicon Valley Bank in a single day. Within weeks, several US banks had failed and Switzerland's Credit Suisse, a 167-year-old global bank, was forced into a rescue merger. In the final part of Great Financial Crises, we look at the 2023 banking turmoil, then draw lessons from all twenty crises.
A boom in deposits
Silicon Valley Bank (SVB) served technology start-ups and venture capital firms. During the pandemic, its clients raised huge amounts of money, and deposits roughly doubled from about $62 billion in March 2020 to $124 billion a year later. By the end of 2022, SVB had about $209 billion in assets, making it the 16th-largest bank in the US.
With few loan opportunities, SVB invested much of the money in long-term US Treasury and mortgage bonds, which were very safe from credit risk but paid low fixed interest.
The interest rate trap
When inflation surged after the pandemic (Part 19), the Federal Reserve raised interest rates rapidly in 2022. As rates rose, the market value of SVB's long-term bonds fell. By the end of 2022, its held-to-maturity bonds had unrealised losses of more than $15 billion, nearly enough to wipe out its capital.
At the same time, tech start-ups were burning cash and raising less new money, so they withdrew deposits. It was the same problem that sank the savings and loans in the 1980s (Part 10): borrowing short and lending long.
The fastest bank run in history
- 8 March 2023: SVB announced it had sold bonds at a loss of about $1.8 billion and planned to raise about $2.25 billion in new capital.
- 9 March: venture capitalists urged their companies to move money out. Customers withdrew about $42 billion in a single day.
- 10 March: regulators closed SVB and placed it under FDIC control. About 89% of its deposits were above the $250,000 insured limit.
- 12 March: New York regulators closed Signature Bank. The government invoked a "systemic risk exception" to guarantee all deposits at both banks, and the Federal Reserve created a new lending facility, the Bank Term Funding Program, to help other banks.
SVB was the third-largest bank failure in US history at the time.
First Republic
Fears spread to other regional banks with large uninsured deposits and bond losses. First Republic Bank lost about $72 billion of deposits in the first quarter of 2023, despite $30 billion of deposits placed by 11 large banks in a show of support. It was seized on 1 May 2023 and sold to JPMorgan Chase. With about $229 billion in assets, it was the second-largest bank failure in US history.
Credit Suisse
In Europe, Credit Suisse had suffered years of scandals and losses. The turmoil in US banks accelerated withdrawals. On 19 March 2023, Swiss authorities arranged for UBS to buy Credit Suisse for about 3 billion Swiss francs, backed by large government and central bank support. About 16 billion francs of Credit Suisse's AT1 bonds, a type of bank debt that can absorb losses, were written down to zero, angering investors.
Why it was contained
Rapid action by regulators, deposit guarantees and emergency lending stopped the panic from becoming a full systemic crisis. Larger banks were generally well capitalised after post-2008 reforms. But the episode exposed gaps in supervision of mid-sized banks and the risks of uninsured deposits in a world of instant digital transfers.
Lessons from twenty great financial crises
From tulip bulbs in 1637 to digital bank runs in 2023, the details change, but the patterns repeat:
- Leverage turns setbacks into disasters. Margin buying in 1929, LTCM in 1998 and banks in 2008 all show how borrowing magnifies losses.
- Short-term funding is fragile. The Panic of 1907, Iceland, and SVB all failed when funding vanished.
- Easy money fuels bubbles. From John Law's paper money to Japan's 1980s and the housing boom, cheap credit inflated asset prices.
- "This time is different" is dangerous. The dot-com bubble and Japan show how new stories justify extreme valuations.
- Currency mismatches and pegs break. Latin America, Mexico, Asia and Argentina all suffered when debts in foreign currency met falling currencies.
- Interest rates matter. Rising rates helped trigger the S&L crisis, the Latin American crisis and SVB's collapse.
- Confidence is everything. Runs happen when people believe others will run first.
- Policy responses shape outcomes. The difference between 1929 and 1987 or 2020 shows the value of a lender of last resort.
- Delay makes losses larger. Japan's zombie banks and the S&L crisis show the cost of avoiding hard decisions.
- Markets recover, but not always quickly. The Dow took 25 years after 1929, the Nasdaq 15 years after 2000, and the Nikkei 34 years after 1989.
What it means for ordinary investors
- Diversify across assets, sectors and countries.
- Avoid borrowing to invest unless you fully understand the risks.
- Keep an emergency fund so you never have to sell in a panic.
- Be sceptical of anything that "can't go down."
- Know where your savings are protected and up to what limit.
- Think long term and stick to a plan.
Thank you for following Great Financial Crises. History does not repeat exactly, but understanding past crises is one of the best ways to prepare for the next one.
Sources
- Wikipedia – Collapse of Silicon Valley Bank
- Corporate Finance Institute – The failure of First Republic Bank
- Axios – Timeline: Silicon Valley Bank's saga
Great Financial Crises: the full series
- Part 1: Tulip Mania (1637)
- Part 2: The Mississippi and South Sea Bubbles (1720)
- Part 3: The Panic of 1907
- Part 4: The Wall Street Crash and Great Depression
- Part 5: Weimar Hyperinflation (1923)
- Part 6: The 1970s Oil Shocks and Stagflation
- Part 7: The Latin American Debt Crisis (1982)
- Part 8: Black Monday (1987)
- Part 9: Japan's Bubble and Lost Decades
- Part 10: The Savings and Loan Crisis
- Part 11: The Mexican Peso Crisis (1994)
- Part 12: The Asian Financial Crisis (1997)
- Part 13: Russia's Default and LTCM (1998)
- Part 14: The Dot-Com Bubble (2000)
- Part 15: Argentina's Collapse (2001)
- Part 16: The Global Financial Crisis (2008)
- Part 17: Iceland's Banking Collapse (2008)
- Part 18: The Eurozone Debt Crisis
- Part 19: The Covid Crash (2020)
- Part 20: The 2023 Banking Turmoil (you are here)
This series is for education only and is not investment advice. Figures are taken from the sources listed and other commonly cited historical records, and may vary slightly between sources.
