The On-Chain Impact of the SVB Bank Run

USDC is the second largest fiat stablecoin behind USDT and has become systemic to DeFi. On March 8, 2023, there was a bank run on Silicon Valley Bank (SVB), and it was announced that $3.3B of USDC deposits were held at SVB.

Our latest Dune Dashboard was created to highlight the on-chain aftershocks caused by the SVB bank run, specifically as it pertains to USDC.

Off-Chain Timeline

During Covid, Silicon Valley Bank’s (SVB) deposits increased from $60B to $180B as the Federal Reserve injected liquidity into the financial system. As deposits rapidly increased, SVB had a problem figuring out what to do with those deposits. At its core, a bank generates profits by borrowing money from depositors and lending it to borrowers. There is an inherent duration risk for banks in a fractional reserve banking system in that they borrow money from depositors with short term agreements (e.g. depositors can withdraw at any time), and lend those deposits out with long term agreements (e.g. someone borrowed from a bank for a 30 year mortgage). With a sudden $120B increase in deposits, SVB could not lend out nearly enough of that new capital while paying new depositors interest. As a result, SVB chased profits by investing a large amount of those deposits into long term treasuries.  

As the Federal Reserve continuously increased the Fed Funds Rate over the course of the past year to combat rising inflation, those treasury bonds that SVB invested in started to decrease in value. As of Dec 31, 2022, SVB had $15B in mark-to-market (MTM) losses on its held-to-maturity (HTM) securities, on total assets of $212B. In addition, SVB did not sufficiently hedge its interest rate exposure on investment securities as its portfolio duration and hedge-adjustd duration were exactly the same at 5.6 years as of Dec 31, 2022.

Nearly half of all venture-backed startups in the U.S. were banked with SVB. As liquidity dried up in the financial markets due to ongoing rate hikes, depositors started withdrawing to meet their liquidity needs. In order to meet those withdrawals, SVB had to sell a $21B bond portfolio consisting mostly of US treasuries, and through the process recognized a $1.8B loss. As a result, SVB launched a $1.75B share sale last Wednesday on March 8, 2023 to strengthen its balance sheet. SVB’s share price subsequently collapsed 60% the next day, signifying a significant lack of investor confidence in the bank’s ability to continue operations.

As the news spread, the market took notice, and startups/VC/other depositors alike started to pull their deposits from SVB, initiating what is commonly known as a bank run. Depositors withdrew $42B on Thursday, March 8 alone. Just before noon on March 10, SVB was closed by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation (FDIC) as the receiver. The announcement stated that “All insured depositors will have full access to their insured deposits no later than Monday morning, March 13. The FDIC will pay uninsured depositors an advance dividend within the next week. Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds. As the FDIC sells the assets of SVB, future dividend payments may be made to uninsured depositors.” As a direct result of this statement, many depositors were unsure of the outcome for their uninsured funds, with an overwhelming majority of SVB clients holding more than the $250k FDIC insurance limit. Importantly, one of these companies was Circle, the issuer of the USDC stablecoin.