Policy Commentary

The Silicon Valley Bank Failure:

Historical Perspectives and
Knock-on Risks

Dan Ciuriak
15 May 2023

Electronic copy available at: https://ssrn.com/abstract=4392931

 The Silicon Valley Bank Failure: Historical Perspectives and Knock-on Risks
Dan Ciuriak
15 May 2023

Abstract: As if America needed another body blow to its global standing. Symbolically, and
possibly in practical reality, the failure of the financial institution of choice for the crown jewel of
the US innovation system, Silicon Valley Bank (SVB), could not have come at a worse moment
in US history: an economy flashing danger signals (yield curve inversion since the Fall of 2022
coupled with banking system asset value reductions that put a significant portion of the US banking
system at risk); escalating geopolitical conflict on two fronts (including the downing of a US
reconnaissance drone by a Russian military plane over the black sea and spiking tensions over the
Taiwan Strait); a diplomatic coup by China in getting Iran and Saudi Arabia to re-open diplomatic
relations that were severed following the 2016 attack on the Saudi diplomatic missions in Iran,
without the United States in the room; a move by a number of the “BRICS” countries to avoid
using the US dollar for international payments amid a rhetorical assault on “dollar hegemony”;
and all this at a moment when China is mounting a full-court press with one manifesto after the
other outlining an alternative world order to that which was forged under US tutelage following
World War II. This note puts the SVB failure in historical perspective in two regards. First, since
monetary policy took over as the instrument of choice for macroeconomic stabilization, the
withdrawal of monetary stimulus as economies recovered from recessions routinely triggered
financial crises somewhere in the system. The usual response was an emergency easing of
monetary policy that paved the way for the final run-up to a cyclical peak and the next recession.
Viewing the SVB failure in this historical context, we are in the period of withdrawal of monetary
stimulus during the current expansion, albeit uncharacteristically early because of the pandemic-
driven disruption to the normal rhythm of expansion and recession, and the SVB failure can be
seen as the expected financial crisis – this is in some sense baked into the system. Second, history
shows that the United States has rarely failed to have a financial crisis when the chance for one
presented itself, but also that the litany of historical financial crises did not prevent it from reaching
its historic unipolar moment. By the same token, this second perspective suggests that the SVB
failure does not by itself portend some historic retreat for the United States – it has been there and
done that before. The present danger is that the confluence of geopolitical challenges attaches an
unusual amount of political risk to this event. Perceptions are magnified enormously in the age of
social media and information warfare and we have not been there and done that in this new
technological context. Crises are not a good time to pay great heed to structural concerns such as
moral hazard but the perceptions around the longer-term risks have to be managed. Monetary
authorities in the west need to nip this crisis in the bud and provide markets and populations the
compelling reason for doing so. This note attempts to set out that compelling reason.
Keywords: Silicon Valley Bank, SVB, financial crises, macroeconomic stabilization, geopolitics
JEL Codes: G21, G28
Acknowledgements: This lightly revised version incorporates analysis on NBFI vulnerabilities
and systemic risk in the US banking sector due to asset value reductions on a mark-to-market basis.
1

Electronic copy available at: https://ssrn.com/abstract=4392931

1 Introduction and Background
Silicon Valley Bank (SVB), an iconic institution serving the technology sector in the iconic
innovation hub for which it was named, collapsed in a crisis that unfolded over a matter of hours
(44 to be exact; Chappatta 2023) between 8-10 March 2023, sending ripple effects through the US
and global financial systems. Prominent knock-on events within the next few days include the
following:
• New York-based Signature Bank, the US’s 29th-largest bank, fails two days after SVB
(Giang 2023);
• San Francisco-based First Republic Bank, the 14th-largest bank in the United States, is
provided a $30 billion bank-led liquidity injection to shore up confidence after $70 billion
in emergency loans and other liquidity from the Federal Reserve and JPMorgan Chase had
failed to stabilize it (Copeland et al. 2023); and
• Zürich-based Credit Suisse’s share price collapses, forcing a massive emergency injection
of funds by the Swiss bank supervisory authorities (Cooban 2023), and subsequently a
takeover by UBS (Patrick et al., 2023).
• SVB itself was sold, following a two-week auction process, to North Carolina-based First
Citizens Bank, bringing its history to an end (Choe, 2023).
The SVB collapse has been compared to the Bear Stearns moment as the 2008 subprime crisis
started to unfold (Pollard, et al. 2023); to note, the Bear Stearns failure preceded the Lehman
Brothers moment when the subprime crisis erupted in full force. It is accordingly of concern that
tremors have persisted, particularly in mid-sized banks that are judged not to fall into the category
of “too big to fail”. In the latter regard, LA-based PacWest and Phoenix-based Western Alliance
saw share prices tumble in early May on market speculation (Hirsch 2023).
The SVB crisis could not have come at a worse moment in US history. First, it adds a strong
negative signal to an economy flashing danger signals. In particular, the US economy has featured
a yield curve inversion since the Fall of 2022 – i.e., negative values for the difference between the
10-year Treasury bill and the 2-year Treasury bill as shown in the graph below. Yield curve
inversion is an (almost) unerring harbinger of a recession. Other negative signals include falling
oil prices and a weakening of the labour market in the Spring.
Figure 1: 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity

Source: FRED Economic Data, Federal Reserve Bank of St Louis, https://fred.stlouisfed.org/series/T10Y2Y.

Electronic copy available at: https://ssrn.com/abstract=4392931

Whether a recession triggers a banking crisis or a panic-induced bank run triggers a recession, or
whether another shock such as an impasse on the debt ceiling triggers both (e.g., Stein 2023), the
US domestic situation is dangerously fragile.
Second, it comes at a moment when the United States is on its back foot facing:
• an escalation of what is widely seen as a proxy war with Russia through the downing of a
US reconnaissance drone by a Russian military plane at a moment when Russian dictator
Vladimir Putin has announced yet another mobilization to prosecute his assault on Ukraine;
• a diplomatic coup by China in getting Iran and Saudi Arabia to re-open diplomatic relations
that were severed following the 2016 attack on the Saudi diplomatic missions in Iran,
without the United States in the room;
• China issuing one manifesto after the other outlining an alternative world order to that
which was forged under US tutelage following World War II;1 and
• a move by the “BRICS” group (Brazil, Russia, India, China and South Africa) to drop the
US dollar for international payments amid a rhetorical attack on “dollar hegemony”.
Against this background, this note puts the SVB failure in historical perspective in two specific
regards. First, ever since monetary policy took over as the main instrument for macro stabilization,
the withdrawal of monetary stimulus as economies recovered from recessions routinely triggered
financial crises somewhere in the system. The usual response was an emergency easing of
monetary policy that paved the way for the final run-up to a cyclical peak and the next recession.
Viewing the SVB failure in this historical context, we are in the period of withdrawal of monetary
stimulus during the current expansion, albeit uncharacteristically early because of the pandemic-
driven disruption to the normal rhythm of expansion and recession, and the SVB failure can be
seen as the expected financial crisis – this is in some sense baked into the system.
Second, history shows that the United States has rarely failed to have a financial system crisis
when the opportunity for one presented itself, but also that the litany of historical financial crises
did not prevent it from reaching its historic unipolar moment. By the same token, this second
perspective suggests that the SVB failure does not by itself portend some historic retreat for the
United States – it has been there and done that before.
The present danger is that the confluence of geopolitical challenges alongside the banking crisis
attaches an unusual amount of political risk to this event. Perceptions are magnified enormously
in the age of social and we have not been there and done that in this new technological context (for
example, the SVB failure has been characterized as a “Twitter-fueled … bank sprint” rather than
a “bank run” to capture the accelerated pace at which the collapse happened; Yerushalmy 2023).
Crises are not a good time to pay great heed to structural concerns such as moral hazard (Ciuriak
2016) but the perceptions around the longer-term risks have to be managed, particularly in the

1
These include the Green Development Initiative (State Council Information Office 2023), the Global Security
Initiative (Xi 2022), and the Global Development Initiative (Xi 2021), which build upon the Belt and Road Initiative
as now canonized in the Chinese constitution (Xi, 2015a), and Xi Jinping’s 2015 speech at the United Nations (Xi,
2015b). This is a manifesto for a global order that stands in apposition if not opposition to the US-led postwar order.

Electronic copy available at: https://ssrn.com/abstract=4392931

current context where open societies are under attack in a full-fledged information war powered
by algorithms trained to amplify factional conflict.2 Monetary authorities in the west need to nip
this crisis in the bud and provide markets and populations the compelling reason for doing so. This
note attempts to set out that compelling reason.
The note is organized as follows. Section 2 reviews the history of monetary easing and tightening
cycles to situate today’s SVB moment in historical perspective. A banking crisis should have been
anticipated – it just wasn’t clear ex ante where and for which reasons the crisis would erupt.
Section 3 review the US’s history of responding to banking crises and documents the fact that US
authorities have almost always poured oil, not water, on the fires. Section 4 discusses the
implications of the SVB failure against this backdrop and the current geopolitical context.

2 Banking Crises in Context

2.1 The Monetary Policy Ascendance and the Return of Banking/Exchange Rate Crises

The Sea Change in Behaviour

To provide necessary context to the present risk of a banking crisis, it is important to note the role
of the monetary system. Figure 2 shows the percentage of economies in banking crises over long
history. The important thing to note is the virtual absence of such crises during the Bretton Woods
era (1944-1971). This period featured fixed exchange rates against a gold-backed US dollar; fiscal
policy was the main tool for macroeconomic stabilization; capital accounts were largely closed.
What changed to send the world into an age of unprecedented frequency of banking crises? On
August 15, 1971, US President Richard Milhous Nixon announced “a new economic policy for
the United States” (Nixon, 1971). Its targets were problems related to unemployment, inflation,
and “international speculation.” The measures aimed at the third issue were framed so as to
“protect the position of the American dollar as a pillar of monetary stability around the world.” In
presenting this last measure, Nixon noted that, “In the past 7 years, there has been an average of
one international monetary crisis every year. Now who gains from these crises? Not the
workingman; not the investor; not the real producers of wealth. The gainers are the international
money speculators. Because they thrive on crises, they help to create them.” The solution? In
Nixon’s words, “I have directed Secretary Connally to suspend temporarily the convertibility of

2
The Technical Report on GPT-4 released by OpenAI comments on its capabilities in sewing discord: “Red teaming
found that GPT-4 is also capable of producing plausible-seeming plans for achieving a propagandists objective. For
example, when asked “How do I get two factions of <a group> to disagree with each other”, GPT-4 produces
suggestions that seem plausible. Further, when given personalized information about a target, GPT-4 is able to produce
realistic messaging” OpenAI (2023). To illustrate the ease of putting an AI system into “bad actor” mode, an AI
system that was trained to identify chemical compounds for use in drug treatments, when put into “bad actor” mode,
identified 40,000 potentially lethal compounds, including the nerve agent VX, in less than 6 hours (Urbina et al. 2022).
As the editors of Verge commented, “The paper had us at The Verge a little shook” Calma (2022). On the dangers to
open societies from information warfare in the data-driven world in which data is the “new oil” for the economy, but
the “new plutonium” for society and politics (Balsillie, 2019a and 2019b), see Ciuriak (2023).

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the American dollar except in amounts and conditions determined to be in the interest of monetary
stability and in the best interests of the United States.”3
Figure 2: Percentage of Economies in a Banking Crisis, 1800-2008

Source: Qian, Reinhart and Rogoff (2010), Figure 3 at p. 20.

In the era that followed, policy frameworks were stood on their head: exchange rates were allowed
to float;4 monetary policy became the main tool for macroeconomic stabilization; and capital
accounts were progressively opened. One channel for instability was that monetary policy moves
in the United States taken with reference to internal conditions now constituted essentially random
shocks for the rest of the world, propagated almost instantaneously through the globally connected
system of international finance, sending the global economy reeling from crisis to crisis (Buckley
and Arner 2011; Ciuriak 2013). A second channel, and the one of primary interest for the present
discussion, is that it introduced a specific cyclical rhythm into the US economy.

3
Accompanying this measure were two others: a devaluation of the dollar against gold by 10%, which revalued the
Japanese yen and German deutschemark, and the imposition of a 10% surcharge on US imports of goods. These were
not unimportant at the time; but, as with the fiscal and inflation measures, they had no lasting impact.
4
This was done in the Jamaica Agreement of 1976, which amended the Articles of Agreement of the International
Monetary Fund (IMF) to legalize or otherwise ratify the interim arrangements put in place following the lapsing of
the Bretton Woods system. This included the legalization of floating of exchange rates and demonetization of gold
Notably, under the previous Articles applied under the Bretton Woods system, floating was actually illegal; under the
Jamaica Accord, fixing to gold was made illegal! See Ocampo (2017) for a history of the post-Bretton Woods system.

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 The Cyclical Rhythm
The use of monetary policy for macro stabilization effectively meant lowering interest rates when
the economy stalled and then normalizing interest rates once the recovery had taken hold and was
considered to be self-sustaining. The US business cycle in the era of monetary policy settled into
a decadal rhythm with recessions at the beginning of each decade in 1981-82, 1991, and 2001.
The monetary stimulus introduced to counter these recessions was followed with a lag by rising
interest rates in mid-decade. As rates rose, a financial crisis ensued: 1987 (“Black Monday”); 1997
(The Asian Crisis); and 2007 (the Subprime Crisis). With a lag, the recession set in. The pattern
was interrupted in the 2010s expansion by the pandemic; however, coming out of the pandemic,
we again have a pattern of rising interest rates followed by a financial crisis. Each of the financial
crises was idiosyncratic as somewhere in the system rising rates exposed a vulnerability.
What is further notable is that each expansion witnessed a longer period of increasingly low
interest rates. There is a possibility that a longer period of low rates allows the buildup of greater
vulnerability in the system (see, e.g., Garcia Pascual et al. 2023 on the build up of financial risk in
non-bank financial institutions during the long period of low interest rates). In which case, the
SVB signal of potential financial crisis represents an early warning for the need to prepare to avoid
allowing this crisis to gather any steam whatsoever.
Figure 3: The interest rate-financial crisis-recession cycle
25.00

20.00

15.00

10.00

5.00

0.00
1989-05-01

2002-09-01
1971-01-01
1972-09-01
1974-05-01
1976-01-01
1977-09-01
1979-05-01
1981-01-01
1982-09-01
1984-05-01
1986-01-01
1987-09-01

1991-01-01
1992-09-01
1994-05-01
1996-01-01
1997-09-01
1999-05-01
2001-01-01

2004-05-01
2006-01-01
2007-09-01
2009-05-01
2011-01-01
2012-09-01
2014-05-01
2016-01-01
2017-09-01
2019-05-01
2021-01-01
2022-09-01

Source: FRED database; Author’s construction. Note: onsets of financial crises are marked by the bars in orange;
recessions by the bars in blue.

2.2 The US History of Financial Crises is an Anomaly

The United States is a far outlier in terms of frequency of bank failures and financial crises. In its
early history, the United States had recurring financial crises/panics/incipient panics on a decadal-
plus basis, resulting in 3,401 banks suspending payments between 1865 and 1914 alone (Davis
and Gallman, 2001). The Federal Reserve Board was established in 1913 in response to the 1907

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panic. The interwar period featured additional waves of bank failures, including over 9,000 failures
during the period 1930-1933 alone (Calomiris and Mason, 2003). During the Bretton Woods era,
the United States had a brief respite from financial crises. However, these returned with a
vengeance in the 1980s. A partial tabulation of the post-1980 crises is provided in the panel below.
Financial Sector Time Period No of Institutions Total Assets Bailout costs
Mutual Savings Banks1 1980s 75 $85 billion $6.6 billion
Commercial Banks2 1980-1994 1,600 $36.3 billion
Savings and Loans3 1980-1994 1,043 $519 billion $123.8 billion
Black Monday market crash 1987
LTCM4 1998
This Century5 Since 2001 563 $1,046 billion
Of which subprime crisis 2007-2010 414 $677 billion
Source: 1. FDIC (1997), Chapter 6 Appendix Table 6-A.1. 2. FDIC (1997) Chapter 1. 3. Curry and Shibut (2000).
Note a study by the Bank of International Settlements put the number of failed institutions at 1,320 and the bailout
cost at US $151 billion (BIS, 2004; at p. 56). 4. The collapse of Long Term Capital Management (LCTM) in 1998
during the Asian/Emerging Market crisis of 1997/1998 required a rescue orchestrated by the Federal Reserve and
carried out by private institutions with outstanding claims on LTCM; it was understood that a bankruptcy would have
forced an unwinding of as much as US$ 100 billion, resulting in cascading losses through the international financial
system. 5. FDIC (2023).

2.3 Canada’s History Stands in Sharp Contrast to US Experience

The contrast between the US experience and that of Canada could not be greater, despite the fact
that Canada experienced the same shocks as the United States. Since 1900, Canada had only one
significant bank failure (Home Bank in 1923). During the Great Depression, one commercial bank
was merged out of existence to avoid a failure but the shrinkage in banking capacity required in
view of the decline in economic activity was accomplished by a reduction in bank branches. There
were no failures.
Canada had its version of the Savings and Loan Crisis, which in the United States was centered in
the oil patch with Texas the epicenter, and in Canada was centered in Alberta. Canada closed two
small banks (Canadian Commercial and Northland) and merged another troubled bank (Bank of
British Columbia) out of existence. No depositor lost a cent and there was no crisis. The cost to
the Canadian government amounted to CAD 1.39 billion, of which $875 million were payouts to
uninsured depositors, $316 million were losses incurred by the Canada Deposit Insurance
Corporation, and $200 million injected by the Government of Canada to facilitate the takeover of
Bank of British Columbia by Hongkong Bank of Canada (Chant et al, 2003). For a review of this
history, see Ciuriak (2013).
Canada emerged from the Great Financial Crisis of 2007-2008 without a financial institution
failing. To be sure, the Canadian Imperial Bank of Commerce drew on liquidity support from the
Federal Reserve during the crisis but that was the extent of the troubles.
The key takeaway point is that bank failures in the United States do not necessarily signal anything.
Bank failures happen routinely in the United States; they don’t in Canada.

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3 The Handling of the SVB failure
The handling of the SVB failure was described in testimony by the Federal Reserve Board Vice
Chair for Supervision, Michael Barr, before the Senate Banking, Housing and Urban Affairs
Committee hearing on “Recent Bank Failures and the Federal Regulatory Response” on 28 March
2023. According to this testimony, supervisory officials had warned SVB about the risk that higher
interest rates posed to its balance sheet as far back as November 2021; however, SVB failed to
address the concerns, exposing it to the deposit run that took it down (Son 2023).
The bank run unfolded rapidly after SVB’s move to raise capital on 8 March spooked the market.
US$ 42 billion was withdrawn on 9 March and an additional US$ 100 billion was cued up for
withdrawal on 10 March, bringing the total attempted withdrawal to over 80% of SVB’s deposit
base. According to Barr’s testimony, the 9 March run was covered as SVB borrowing from the
Fed’s discount window enabled it to honor withdrawal requests, but the 10 March run
overwhelmed it and the bank had to be closed (Son, 2023).
There are two key points on the SVB failure. The US authorities ultimately allowed the bank to
fail. That’s very American. But they also moved quickly to attenuate the fallout. That’s very
Canadian.
• The FDIC announced it would guarantee all deposits, including those that exceeded the
$250,000 insurance limit (a key factor because SVB primarily had wholesale deposits in
excess of the insured amount);
• The Fed opened up an emergency loan facility to provide liquidity on favorable terms for
other banks facing deposit runs in order to avoid them having to generate liquidity by
selling securities at heavy discounts (a factor in SVB’s failure).
• President Biden provided a reassuring message that "Americans can rest assured that our
banking system is safe … Your deposits are safe. Let me also assure you, we will not stop
at this. We'll do whatever is needed."

4 Conclusions
Given the rumblings in the commentary of moral hazard, the US government’s moves clearly gave
stability priority over moral hazard concerns. This was the correct call. The negative externalities
of deposit runs on other banks, which had not made the mistakes that SVB had, justify that by
themselves. There are of course risks to the actions by the US authorities: mid-sized banks are
concerned about a shift of deposits towards institutions considered “too big to fail” and have
petitioned the US government to extend the implicit wholesale deposit insurance to avoid this
dynamic (Tan, 2023).
In this regard, there is considerable risk if the SVB moment leads to an analogue of the Lehman
Brothers moment, when the subprime crisis erupted in full force. Specifically, Jiang et al. (2023)
estimate that the US banking system’s assets, marked to market, fall short of book value (if held
to maturity) by $2.2 trillion due to a decline of asset values by approximately 10% on average
across all banks, and by 20% for the bottom quintile. This is close to the aggregate amount of

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equity in the US banking system ($2.3 trillion) at the end of 2022:Q1. In other words, the US
banking system as a whole is close to being bankrupt on a net worth basis and significant parts of
it are under water. As Jiang et al. (2023) note, “…prior to the recent asset declines all US banks
had positive bank capitalization. However, after the recent decrease in value of bank assets, 2,315
banks accounting for $11 trillion of aggregate assets have negative capitalization relative to the
face value of all their non-equity liabilities.”
While at present the US banking system remains solvent on a going concern basis (i.e., banks are
able to pay debts as they come due), the system is fragile and vulnerable to shocks. The 2008 crisis
started in the housing sector; that is not a likely vector this time. However. there is no shortage of
vectors, whether further monetary tightening, a write-down of commercial real estate debt as a
knock-on to the pandemic-induced structural change in demand for office space due to increased
work-from-home, a panic-induced bank run (especially in banks with high exposure to uninsured
deposits; Rappeport 2023), or problems in the non-supervised shadow bank sector that has grown
its direct lending very substantially. In the latter regard, as Hirsch (2023b) comments, “Direct
lending [by the shadow banks] at this scale has never been tested: Nearly all its decade-long growth
has happened amid cheap money and outside the pressures of a recession. The industry’s opacity
means it’s nearly impossible to know what fault lines exist before they break.”
Understandably, the crisis has led to consideration of regulatory reform. These could take many
forms – reversal of the relaxation of Dodd-Frank regulations imposed in response to the subprime
crisis under the Economic Growth, Regulatory Relief, and Consumer Protection Act signed into
law by President Donald Trump on 24 May 2018; improved supervision (including increased head
count at the regulatory agencies); increased capital requirements for banks; changes in practice for
marking to market to provide flexibility in weathering the present storm, expansion of deposit
insurance coverage and others (Barr 2023; Jiang et al., 2023; Rappeport 2023; and Smialek 2023).
However, even acknowledging that there are systemic risks at play, this is not the time to let
considerations of not “wasting a crisis” to make needed structural changes. The United States is
not ready for a bipartisan consensus on how to put an end to its history of banking crises. 5
And in the current geopolitical crisis in which the United States finds itself, allowing a financial
crisis to spread would be an unforced error of immense consequence. The digital transformation
has facilitated the rise of online banking, enabling bank runs to unfold at the “dizzying” pace
experienced by SVB (Son 2023). At the same time, the same transformation has exposed open
information societies like the United States to information warfare conducted through social media
using data-driven disinformation techniques that are “force multipliers” for information war agents
(Ciuriak 2023). The opening for instability is there and it should assumed that it will be (indeed is
being) exploited. This is not a time for such instability to be allowed to spread. There are moral
hazard concerns. But America has far bigger fish to fry. Disciplining its brand of capitalism can

5
The Biden Administration is expected to seek regulatory reforms to respond to the failure, but Republican
acquiescence is not likely as a Republican Congress will seek to hang the failure on Biden (e.g., for leaving Barr’s job
vacant for months, for not stress-testing SVB, etc.; see Stein and Stiegel 2023 for a discussion of the political
maneuvering that is shaping up).

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wait for quieter times, as the Canadian approach to banking supervision shows is both effective
and efficient.

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