The dust’s still settling on the second-biggest US bank failure in history. The Federal Deposit Insurance Corporation (FDIC), the body that guarantees customer deposits, closed Silicon Valley Bank’s (SVB) doors after a dramatic few days which saw the bank's startup-heavy customers rush to pull their deposits as rumors swirled that the bank was struggling to meet those cash calls.

It all happened so quickly, and seemingly so easily, that investors are rightly asking whether this sort of thing could happen to an even bigger, even more important US bank (or a string of them). Here’s what you need to know now…

First, how did SVB end up so deep in the hole?

A bank’s business is to take customer deposits and loan some of them out to people and businesses. Banks usually lend out between 70% and 90% of the deposits they've collected. But, during the pandemic and its aftermath, customers (especially cash-rich tech startups that were flush from funding rounds) flooded banks with deposits. And, at the same time, because business and everyday consumer spending had ground to a halt, there wasn’t a whole lot of demand for bank loans. SVB had to do something with all that cash, though, so it parked it in government bonds – a perfectly sensible thing to do. At almost any other time, that would be fine: government bonds are safer than loans, after all, and the bank would have earned a tiny bit of interest. But then red-hot inflation came along in 2022 and forced the Federal Reserve (Fed) into the fastest rate-hiking program in its history. So all those recently purchased bonds plunged in value. That doesn’t happen to loans. They aren’t priced every day, and rate rises don’t mean they lose value – provided they’re repaid, of course.

Now banks have a choice of how they categorize those government bonds. They can keep them in an available-for-sale (AFS) account or label them held-to-maturity (HTM). Call them AFS and they’re as good as cash, immediately available to be sold to, say, meet deposit withdrawal requests. Thing is, AFS securities are required by regulators to be marked to market, meaning their real-time price has to be recorded on a bank's balance sheet. And for SVB, that would have meant notching heavy losses as those bond prices fell. To avoid that, SVB chose to shift a hefty chunk of those government bond holdings from AFS to HTM, where no such daily mark-to-market recording is required. The catch, though, is that once you label securities HTM, you have to follow through and actually hold them to maturity. And maybe that’s fine: US government bonds are as good as risk-free, and provided they are held to maturity, your problem’s solved – no more accounting losses and everything’s hunky dory.

That is, until depositors (in this case, tech startups running into money problems themselves) want their funds back. The thing about the Silicon Valley startup world is that it’s nothing if not networked – so, whispers about the bank's troubles quickly went viral. SVB soon had a massive problem.

Now, it could have switched those HTM bonds back into the AFS account, sold them, and returned the cash. But that would have meant “marking to market” those bonds and recording colossal losses, which the bank wouldn’t have been able to cover. So instead it did what all banks do: it called for calm, said all was well, and pledged to raise some new capital in the meantime. Unfortunately for SVB, it didn’t work. Panicked customers kept pulling their funds and eventually, the bank couldn’t raise the capital it needed, and the rest is (very recent) history.

What does this mean?

While I’m a tiny bit reluctant to dismiss this as just an isolated event at a specialist bank, that’s probably what it is. That said, the shadow of the 2008-09 banking crisis still looms large some 15 years on, and while it’s true that regulators now force banks to hold excess funds to avoid any repeat of that disaster, all crises start somewhere, and that somewhere, by definition, won’t have been spotted by regulators: they simply can’t 100% future-proof everything.

But, there are some unique aspects of SVB that probably do mean its failure will turn out to be a one-off – and not a tinderbox scenario that’s likely to spread to other, potentially bigger banks.

Firstly, the nature of its customers. SVB is specialized in helping young tech companies get off the ground. Most banks are much more diversified than SVB, catering to regular savers and businesses from all walks of life. That means that the type of rumor that fuelled the run on SVB’s deposits, which came from within the tight-knit tech circle, is unlikely to happen elsewhere. After all, what would you do with the cash you withdrew? Put it in another bank?

And secondly, the FDIC exists for exactly this reason. It insures up to $250,000 of customer deposits precisely to stop bank runs, and most customers of regular banks don’t have that sort of money in their accounts. In fact, that’s why the FDIC moved so quickly to reassure SVB’s customers that they can get their money back as early as Monday. That sends a strong message to anyone worryingly eyeing their own balance at other banks and wondering if they’d be better off stashing that money in the mattress. Unfortunately for SVB, its customer base is special, in that a whole lot of them are businesses with more than $250,000 in their accounts. And that, of course, added to the panic.

Bank runs happen, but, thankfully, they’re rare, usually the result of some other problem. They don’t emerge out of thin air. When it comes to money, though, people can act first and ask questions second. And that's why there is so much tension.