A recent article from The New York Times highlighted the ongoing debate over a possible collapse of Silicon Valley Bank (SVB) in 2023 and its subsequent takeover by the Federal Deposit Insurance Corporation. Many observers argue that the failure was due to insufficient regulation, raising valid questions about why authorities did not intervene sooner with SVB, as well as with Signature Bank and First Republic Bank. Concerns were also voiced about those financial institutions' heavy concentration in specific investments and customer bases. SVB, for example, held a significant portfolio of Treasurys and mortgage-backed securities and was closely linked to tech companies, which not only maintained large cash balances but also could withdraw those funds rapidly if needed.
An analysis by the Federal Reserve Bank of New York in the fall of 2024 pointed out that marked-to-market losses increased the likelihood that banks would attract heightened scrutiny from regulators and credit agencies. This, in turn, could alarm investors and make banks more susceptible to runs by uninsured depositors. The risk posed by marked-to-market losses remains a concern. According to the FDIC’s latest quarterly report of unrealized losses—the gap between market value and book value of non-equity securities reached $482.4 billion in the fourth quarter of 2024. This represented a 32.5% increase, or $118.4 billion, from the previous quarter, and a 1% rise, or $4.8 billion, compared to the same period in 2023. The report attributed this to significant increases in longer-term interest rates, such as the 30-year mortgage and 10-year Treasury rates, which drove down the value of securities held by banks.
It is important, however, to keep the events of 2023 in perspective. FDIC data shows that the total assets involved in bank failures that year amounted to $548.7 billion—much higher than during any single year of the Global Financial Crisis. Yet, the number of failed banks was relatively small at just five, a figure not unusual in any given year. According to Rehan Hasan, partner and chair of the corporate practice at Omnus Law, Silicon Valley Bank’s downfall was due to its reckless approach, acting more like a venture fund than a traditional bank. “They took on excessive risk backing ventures, and their portfolio lacked the balance and discipline you'd expect from a traditional commercial bank,” Hasan told GlobeSt.com, adding that the failure was ultimately a matter of poor judgment rather than regulatory oversight.
Javier Palomarez, chief executive of the United States Hispanic Business Council, notes that even with regulations designed to curb risky strategies, banks often find alternative ways to generate revenue. He points out that regulations such as the Dodd-Frank Act have sometimes been rolled back when deemed unnecessary. Palomarez argues that another SVB-style collapse would likely result from malpractice and irresponsible strategy, rather than from inadequate regulation.
Daniel Ahn, chief executive of Delfi Labs, believes that the real safeguard for banks like SVB, especially given the rise in unrealized losses, is a sound hedging strategy. He asked: “Why didn’t regulators tell them to hedge against it?” Ahn further noted that recent research suggests many banks simply opt not to do this for various reasons. Delfi Labs’ analysis of the SVB situation found that a proper hedging strategy could have turned a multi-billion-dollar loss into a multi-billion-dollar profit. Ahn emphasizes the importance of considering the current context, with markets pricing in historically high volatility in interest rates. “I think everyone should be really thinking about interest rate risk right now,” he said.
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