I. Good Clients, Fast Movers

Silicon Valley Bank had over $200 billion in consolidated assets and $175 billion in deposits at the end of 2022. Despite its 40-year history and solid reputation, the bank collapsed in spring 2023.

Silicon Valley Bank was renowned for serving innovative enterprises. Its depositor clients were typically innovative companies receiving institutional investment, not ordinary citizens. Even individual clients were mainly high-net-worth individuals or highly educated professionals.

In response to the Federal Reserve’s eight rate increases within one year, Silicon Valley Bank’s clients more closely resembled Mark Mobius’s sense of urgency—they were institutions with large balances, well-informed, and quick to act.

Unlike the 2008 subprime crisis, Silicon Valley Bank did not engage in high-risk investments. With abundant liquidity injected by the Federal Reserve to stimulate the economy, venture capital firms and startup companies all benefited. These easily-obtained funds became quality deposits for Silicon Valley Bank.

Within the past year, the macro environment changed dramatically as the Federal Reserve raised interest rates from zero to 4.5%. This rapid and substantial rate increase produced two immediate consequences:

First, funding costs increased, making it progressively difficult for startups to obtain financing. Second, as interest rates rose, fixed-rate bond prices fell correspondingly.

As a listed company, Silicon Valley Bank’s bond value decline was visible to all, triggering short-selling. This led to deposit customer concerns, some began transferring deposits, creating liquidity pressure. The bank had to sell bonds at losses to cover funds, further aggravating deposit customers’ negative judgments, quickly leading to the March 9 bank run.

No bank can survive when all depositors withdraw on the same day. The basic commercial banking model of “short-term deposits, long-term loans” operates on time gaps. Poor time gap management leads to bank runs. In 1983, economists Douglas Diamond and Philip Dybvig provided a concise economic model explaining bank runs, earning them and former Federal Reserve Chairman Bernanke the 2022 Nobel Prize in Economics.

II. “Sand on the Wheels”

According to South China Morning Post reports, Mark Mobius described his experience with HSBC Shanghai: “They didn’t say I couldn’t transfer money. But they said, ‘Please provide 20 years of records showing how you made this money—this is insane.’”

Actually, it’s not HSBC that is insane; it’s media willingly传播危言耸听. Chinese and foreign banks both have anti-money laundering compliance obligations. Large cross-border fund transfers, even domestic RMB transfers, give banks reason to concern themselves with the legitimate source of funds.

The reason Mobius’s complaints received widespread attention in Chinese and foreign media is because everyone knows U.S. interest rate increases mean China’s capital outflow pressure has increased significantly.

III. Behavioral Strategies in Financial Supervision

If human nature and behavioral characteristics are not considered, any legal provisions or risk prevention mechanisms like Basel III will become mere Maginot Lines. Singapore, with its British rule of law tradition and Chinese cultural wisdom, deeply understands this.

When Singapore’s Second Minister of Home Affairs responded to parliamentary inquiries about disclosing specific standards for citizenship review applications, he stated: “If we disclose specific review standards, people will engage in targeted games around them, making it more difficult for us to maintain the fairness of the citizenship review process… most applicants come from neighboring countries; we fully consider our country’s unique historical and geographic factors.”

The rule of law is premised on transparency and openness, but specific circumstances require exceptions. In the United States, CFIUS (Committee on Foreign Investment in the United States) does not disclose its review mechanisms.

China’s reformed National Financial Regulatory Administration breaks through some industry divisions, more focused on functional supervision, behavioral supervision, penetrating supervision, and full coverage.

As Silicon Valley Bank demonstrates, rigidity in decision-making allowed originally stable investments to become risk concerns after interest rate increases, ultimately being counter-reigned by its own clients’ swift actions. Upon the National Financial Regulatory Administration’s departure, Silicon Valley Bank’s collapse provides a vivid case study for analyzing behavioral supervision.

About the Author

Hong Shihong, Attorney

Director of the Cross-Border Business Committee, Longan (Shanghai) Law Firm.

Since obtaining California bar admission in 2000, Attorney Hong has been dedicated to providing legal consultation and agency services for Chinese and foreign enterprises regarding cross-border investment and M&A, international tax planning, and cross-border dispute resolution.