The collapse of Silicon Valley Bank (SVB) in 2023 remains a landmark event in recent U.S. financial history, with a recent court case providing additional insight into the factors and responsibilities behind the bank’s rapid downfall. Once valued at more than $40 billion in 2021, SVB’s market capitalization had declined to around $15 billion during the week of its collapse, underscoring the swift deterioration that followed.

SVB experienced rapid growth prior to its failure, expanding its deposit base from $50 billion in 2018 to a peak of approximately $200 billion by 2021. The bank invested heavily in long-term bonds, including mortgage-backed securities, as a means of deploying these deposits. However, when interest rates increased sharply in 2022, the bank suffered significant paper losses of approximately $15 billion on its held-to-maturity bond portfolio.

The crisis escalated dramatically when a bank run triggered the withdrawal of $42 billion in deposits over a single day. This prompted the Federal Deposit Insurance Corporation (FDIC) to place the SVB banking subsidiary into receivership, while the bank’s holding company subsequently filed for bankruptcy.

The recent litigation centered on $1.7 billion in claims related to approximately $2 billion in deposits held by the SVB parent company at the bank subsidiary. Upon taking control of the SVB banking subsidiary, the FDIC, with authorization from the Federal Reserve and Treasury, guaranteed SVB deposits. However, the FDIC did not return the holding company's deposits, asserting its right to withhold the funds under “set off rights” due to alleged breaches of fiduciary duty linked to the risky bond portfolio decisions that contributed to SVB’s losses.

SVB contended in court that regulators had not identified any deficiencies in its risk controls or business strategy before the collapse, arguing that it was entitled to the return of those funds. This position came in the context of an earlier Federal Reserve report that found the bank had breached long-term risk management controls.

During the trial, the FDIC emphasized communications among SVB executives that highlighted concerns about the bank’s risk profile. An email from Zain Haider, a senior risk official, noted the bank’s excessive exposure to long-duration, fixed-rate mortgage-backed securities and insufficient diversification, suggesting an awareness of vulnerability. The court sided with the FDIC’s expert testimony, concluding that mismanagement of SVB’s balance sheet accounted for approximately $4.5 billion in economic losses—surpassing the holding company’s deposit claim.

The bank’s disclosures revealed a strategy focused on maximizing shareholder returns by aggressively investing deposits, resulting in significant unrealized losses due to market fluctuations rather than toxic assets akin to those that triggered the 2008 crisis. Nevertheless, SVB’s collapse underscored the critical importance of depositor confidence, particularly given the bank’s substantial leverage ratio—using about $1 trillion in equity to support every $14 in assets shortly before failure.

The presiding judge remarked that SVB’s board and management operated with structures suited to a smaller regional bank, a mismatch given the institution’s rapid expansion and growing risk exposure. The case highlights the delicate balance financial institutions must maintain between prudent risk management and the pursuit of shareholder value, a dynamic that continues to challenge the sector. As consumer funds increasingly migrate toward insurance companies and asset managers, debates over risk tolerance and oversight are expected to intensify, suggesting that SVB may not be an isolated example of misjudged risk-taking in the banking industry.