The Collapse of Silicon Valley Bank - Lessons about 'Stability'

In early 2023, Silicon Valley Bank (SVB) collapsed. (Yes, the same collapse that caused the depeg of USDC)

Not because of crypto. Not because of fraud.

But ironically because it tried to play it safe.

SVB held tens of billions in U.S. government bonds -- the gold standard of stability.

And yet, it broke.

How? Let's walk through it.

1. Safe Assets… Until They Aren't

During the tech boom, SVB's deposits surged, mostly from startups and VC-backed firms. With more cash than they could lend out, the bank did what many others did:

It parked that money in long-term U.S. Treasuries.

On paper? A sound decision. Treasuries are backed by the U.S. government. They're supposed to be the safest thing you can hold.

But there's a catch.

Bonds are sensitive to interest rates.

When rates go up, bond prices go down.

So when the Fed began its most aggressive hiking cycle in decades -- from near-zero to over 5% in under a year -- the value of SVB's bond portfolio started to bleed.

And because those bonds were long-dated, the losses were huge.

Unrealized, yes. But real.

2. How Duration Risk Broke the Bank

Here's where it gets dangerous:

• SVB's customers started needing cash.
• To meet withdrawals, SVB had to sell bonds.
• But those bonds were now worth far less than what SVB paid.
• Selling them meant realizing massive losses and exposing the hole in its balance sheet.

Then came the fatal move: a failed capital raise and a panicked investor call.

Within 48 hours, $42 billion was withdrawn.

That's all it took to kill a bank holding "safe" assets.

3. The Link to Treasury Yields

This wasn't just bad luck. It was the inevitable result of structural tension:

• Short-term interest rates rise when the Fed hikes.
• Long-term yields rise when markets lose confidence: in inflation control, fiscal discipline, or sovereign debt sustainability.

SVB got caught in the crossfire.

It held long-term bonds in a world waking up to long-term risk.

And here's the key: the Fed can't fully control long-term yields.

It can set overnight rates. It can talk markets up or down. It can even buy bonds (QE) or let them run off (QT).

But it can't override market psychology forever.

When investors believe inflation or debt is spiraling, they demand higher yields. And no amount of jawboning fixes that.

4. Enter the Bailout (Without Calling It One)

To prevent wider contagion, the Fed launched the Bank Term Funding Program (BTFP).

What does it do?

• Banks can borrow money using Treasuries and mortgage-backed securities as collateral.
• Crucially: those assets are valued at par -- not at their (lower) market value.

Translation?

Banks sitting on massive unrealized losses can now pretend those losses don't exist.

They get liquidity, not by selling, but by borrowing against the fiction of face value.

This is not a bailout in name. But in function? It absolutely is.

Losses don't disappear. They're just moved.

And if loans go bad or markets don't recover, the Fed absorbs the damage.

And where does the Fed's balance sheet shortfall go?

Eventually? To the Treasury.

And how does the Treasury pay for it?

With more debt.

And so the snake eats its own tail.

5. What This Means Going Forward

We're still living through the slow consequences of that cycle.

Rising rates have made large swaths of the banking sector fragile -- especially regional banks with exposure to long-dated assets.

And now, as bond yields creep back up, the stress is building again.

The U.S. national debt is over $36 trillion.
Interest payments are ballooning.
Long-term confidence is wobbling.
Treasuries, the foundation of "safe" assets, might no longer be risk-free.

And yet, the system pretends otherwise.

Stablecoins are still backed by these bonds.
Banks still hold them on their books at par.
Politicians still promise "we'll never default."

The same illusion, repeating.

6. Why Unstable Matters

This isn't about fear.

It's about clarity.

Stablecoins depeg because their foundations crack.
Banks collapse because rate risk compounds.
Backstops delay the reckoning but they don't erase the fragility.

Stable is not the opposite of volatile.

It's often just the name we give to things we're afraid to examine too closely.

Unstable doesn't offer safety, it offers honesty.