2023 United States banking crisis

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=== Interest rate risk and bond market devaluation ===

=== COVID-19 pandemic and federal stimulus ===

In financial markets, [[Primary dealer|primary dealers]] purchase government securities (such as [[United States Treasury security|U.S. Treasury Securities]]) directly from the [[United States Department of the Treasury|U.S. Treasury]] during regular auctions to ensure the national debt is funded, while secondary dealers and commercial banks trade these existing assets on the [[Secondary market|secondary open market]]. One such example of a secondary dealer was Silicon Valley Bank (SVB), which primarily served tech sector clients.

In financial markets, [[Primary dealer|primary dealers]] purchase government securities (such as [[United States Treasury security|U.S. Treasury Securities]]) directly from the [[United States Department of the Treasury|U.S. Treasury]] during regular auctions to ensure the national debt is funded, while secondary dealers and commercial banks trade these existing assets on the [[Secondary market|secondary open market]]. By doing so, primary dealers secure a privileged gatekeeping position that allows them to serve as the sole counterparties for the [[Federal Reserve|Federal Reserve’s]] monetary policy operations and profit from the bid-ask spreads inherent in maintaining secondary market liquidity. Examples of primary dealers include [[JPMorgan Chase]], [[Goldman Sachs]], [[Wells Fargo]], and [[Citigroup]]. Examples of secondary dealers include regional banks, specialized hedge funds, and at one point, [[Silicon Valley Bank]] (SVB).

During the early years of the [[COVID-19 pandemic]] between 2020 and 2021, as customers shifted to digital services, tech startups saw record fundraising levels. As a result, commercial banks serving tech clients such as SVB saw total deposits grow from $62 billion in March 2020 to $189 billion by the end of 2021.{{Cite web |title=Why did Silicon Valley Bank fail? |url=https://www.economicsobservatory.com/why-did-silicon-valley-bank-fail |access-date=2026-04-04 |website=Economics Observatory |language=en}}

During the early years of the [[COVID-19 pandemic]] between 2020 and 2021, as customers shifted to digital services, tech startups saw record fundraising levels. As a result, commercial banks serving tech clients such as SVB saw total deposits grow from $62 billion in March 2020 to $189 billion by the end of 2021.{{Cite web |title=Why did Silicon Valley Bank fail? |url=https://www.economicsobservatory.com/why-did-silicon-valley-bank-fail |access-date=2026-04-04 |website=Economics Observatory |language=en}}

At the same time, [[U.S. federal government response to the COVID-19 pandemic|following massive stimulus into the U.S. economy]] by the federal government and the Federal Reserve, corporate and consumer demand for traditional commercial loans decreased significantly as tech firms were flush with venture capital and stimulus-related liquidity, and therefore had little need for conventional debt. Consequently, banks were forced to find alternative vehicles for their idle cash to generate a profit (a core institutional function) leading them to park these massive reserves into the bond market. They favored long-dated [[United States Treasury security|U.S. Treasury Securities]] and [[Mortgage-backed security|mortgage-backed securities]] (MBS) because these offered slightly higher yields than short-term investments and were perceived as "risk-free" at the time.{{Cite news |last=Smith |first=Stacey Vanek |date=2023-03-19 |title=Bank fail: How rising interest rates paved the way for Silicon Valley Bank's collapse |url=https://www.npr.org/2023/03/19/1164531413/bank-fail-how-government-bonds-turned-toxic-for-silicon-valley-bank |access-date=2026-04-04 |work=NPR |language=en}}

At the same time, [[U.S. federal government response to the COVID-19 pandemic|following massive stimulus into the U.S. economy]] by the federal government and the Federal Reserve, corporate and consumer demand for traditional commercial loans decreased significantly as tech firms were flush with venture capital and stimulus-related liquidity, and therefore had little need for conventional debt. Consequently, banks were forced to find alternative vehicles for their idle cash to generate a profit (a core institutional function) leading them to park these massive reserves into the bond market. They favored long-dated [[United States Treasury security|U.S. Treasury Securities]] and [[Mortgage-backed security|mortgage-backed securities]] (MBS) because these offered slightly higher yields than short-term investments and were perceived as "risk-free" at the time.{{Cite news |last=Smith |first=Stacey Vanek |date=2023-03-19 |title=Bank fail: How rising interest rates paved the way for Silicon Valley Bank's collapse |url=https://www.npr.org/2023/03/19/1164531413/bank-fail-how-government-bonds-turned-toxic-for-silicon-valley-bank |access-date=2026-04-04 |work=NPR |language=en}}

=== Interest rate risk and bond market devaluation ===

However, the yields on these securities had been driven to near-zero levels as the [[U.S. federal government response to the COVID-19 pandemic#Federal Reserve|Federal Reserve suppressed interest rates]] (via [[quantitative easing]]) to stabilize the financial market [[2020 stock market crash|following the 2020 pandemic lockdowns]]. While these low rates incentivized aggressive speculation and record-breaking capital infusions into the tech sector, which significantly inflated bank deposit bases, the subsequent [[2021–2023 inflation surge#United States|Federal Reserve interest rate hikes in 2022]], enacted to combat the [[2021–2023 inflation surge|2021-2023 inflation surge]], caused bond prices to decline sharply. This collapse in market value eroded [[Bank reserves|bank capital reserves]] and forced Silicon Valley Bank to sell its devalued assets in the secondary market to maintain liquidity, realizing the steep losses that ultimately triggered its collapse.{{Cite news |last=Barrett |first=Jonathan |date=2023-03-13 |title=Silicon Valley Bank: why did it collapse and is this the start of a banking crisis? |url=https://www.theguardian.com/business/2023/mar/13/silicon-valley-bank-why-did-it-collapse-and-is-this-the-start-of-a-banking-crisis |access-date=2026-04-04 |work=The Guardian |language=en-GB |issn=0261-3077}}

However, the yields on early pandemic bonds had been driven to near-zero levels as the [[U.S. federal government response to the COVID-19 pandemic#Federal Reserve|Federal Reserve suppressed interest rates]] (via [[quantitative easing]]; rapidly repurchasing U.S. Treasuries from primary dealers on the secondary market and flooding those sellers with instant cash reserves) to stabilize the financial market [[2020 stock market crash|following the 2020 pandemic lockdowns]]. The reason yields went down is because when the Fed creates an artificial surge in demand by aggressively bidding up the price of existing bonds, the fixed interest payments on those bonds represent a smaller and smaller percentage of the increased purchase price, thereby mathematically compressing the yield toward zero. For example, if one pays $1,000 for a bond that pays $20 a year, the yield is 2%. But, if the Fed starts a bidding war and drives the price of that same bond up to $2,000, that $20 payment now only represents a 1% yield. The payment didn't change; the entry price did. By overpaying for bonds, the Fed effectively forces the "interest rate" of the entire market to collapse.

Thereafter, these low rates incentivized aggressive speculation and record-breaking capital infusions into the tech sector throughout the pandemic, which significantly inflated bank deposit bases. However, the subsequent [[2021–2023 inflation surge#United States|Federal Reserve interest rate hikes in 2022]], enacted to combat the [[2021–2023 inflation surge|2021-2023 inflation surge]], caused bond prices to decline sharply. This is so because of a concept called [[bond convexity]], where when interest rates rise from the [[Federal funds rate|fed funds rate]], new bonds are issued with higher coupon payments (due to market forces against the [[United States Department of the Treasury|U.S. Treasury]] to issue higher yields as a hedge against the fear of inflation), which makes existing bonds with lower rates appear unattractive. Therefore, to entice a reasonable investor to purchase these older, lower-yielding bonds, their market price must drop until their total return (consisting of the original low interest plus the discount on the purchase price) aligns with the newer, higher market rates.

This scenario is precisely what happened to SVB. Consequently, this collapse in market value eroded [[Bank reserves|bank capital reserves]] and forced Silicon Valley Bank to sell its devalued assets in the secondary market to maintain liquidity, realizing the steep losses that ultimately triggered its collapse.{{Cite news |last=Barrett |first=Jonathan |date=2023-03-13 |title=Silicon Valley Bank: why did it collapse and is this the start of a banking crisis? |url=https://www.theguardian.com/business/2023/mar/13/silicon-valley-bank-why-did-it-collapse-and-is-this-the-start-of-a-banking-crisis |access-date=2026-04-04 |work=The Guardian |language=en-GB |issn=0261-3077}}

=== Venture capital and cryptocurrency volatility ===

=== Venture capital and cryptocurrency volatility ===