Why Banks Keep Failing: Lessons from SVB & Financial Insights

The collapse of Silicon Valley Bank (SVB) in 2023 sent shockwaves through global financial markets and raised uncomfortable questions: How could such a well-known institution fail so quickly? Could it happen again — or closer to home?

Although UK banks are generally seen as well-capitalised and tightly regulated, SVB’s sudden downfall offers valuable lessons for both investors and ordinary consumers. Bank failures are not relics of the past. They still happen — and when they do, the ripple effects can be far-reaching.

This article explores the reasons why banks continue to fail, what SVB revealed about modern banking vulnerabilities, and what consumers in the UK should know to better protect themselves.

What Happened with SVB?

Silicon Valley Bank was a major lender to the tech sector in the US, with billions in deposits from start-ups, venture capital firms and tech executives. Its downfall in March 2023 was swift and dramatic.

The core issue? Interest rate risk combined with a lack of diversification. SVB invested heavily in long-term government bonds during a period of low interest rates. But when the US Federal Reserve sharply raised rates to combat inflation, those bond values dropped — creating massive unrealised losses.

As concerns spread, depositors rushed to withdraw funds in what became a modern-day bank run. Within 48 hours, the bank collapsed, making it the second-largest bank failure in US history at the time.

Although SVB had a branch in the UK, its failure didn’t trigger a systemic crisis here. However, it raised alarm bells about how fragile even well-known banks can be when fundamental risks are mismanaged.

Why Do Banks Fail?

While every case has its own specifics, bank failures often stem from a combination of poor risk management, bad timing and eroded public confidence. Key factors include:

1. Liquidity Mismatch

Banks take short-term deposits and lend long-term. When too many depositors want their money back at once — and the bank can’t liquidate assets quickly enough — it faces a cash crunch. This mismatch is at the heart of most bank runs.

2. Interest Rate Exposure

Like SVB, many banks hold large portfolios of fixed-income securities. Rapid changes in interest rates can cause these holdings to lose value, especially if banks need to sell them before maturity to meet withdrawal demands.

3. Concentrated Customer Base

Banks that rely heavily on one sector — such as tech or real estate — are vulnerable when that sector faces a downturn. Lack of diversification makes them less resilient during shocks.

4. Poor Governance or Oversight

Failures in internal controls, weak regulatory compliance, or excessive risk-taking by leadership often play a role in collapses. In some historic cases, outright fraud was involved.

5. Loss of Confidence

Even if a bank is solvent on paper, rumours or negative headlines can trigger mass withdrawals. In today’s digital age, where money can move in seconds, confidence can evaporate faster than ever.

Lessons for UK Consumers and Investors

Although UK financial institutions are regulated by the Prudential Regulation Authority (PRA) and subject to rigorous stress testing, no system is infallible. SVB’s collapse shows how quickly market conditions can shift, and why it’s important for individuals to stay informed and take basic precautions.

Don’t Assume All Banks Are the Same

High-street names like HSBC, Lloyds and NatWest operate very differently from niche or sector-focused banks. Challenger banks, fintechs and overseas-based institutions may not have the same capital buffers or customer protections.

Before placing large sums with a less familiar provider, check that it is authorised by the Financial Conduct Authority (FCA) and covered by the Financial Services Compensation Scheme (FSCS), which protects up to £85,000 per person, per institution.

Avoid Holding Large Cash Balances in One Place

Spreading your savings across different institutions can protect you if one bank becomes inaccessible. For those with more than £85,000 in savings, it may be worth using multiple providers to stay within FSCS limits.

You can also use tools like the FSCS protection checker to ensure that similar-sounding brands aren’t part of the same banking licence, which would limit your coverage.

Pay Attention to Interest Rates — and the Trade-Off

Some savings accounts offering unusually high returns may be run by smaller or less stable banks. While attractive, it’s important to assess why they’re offering those rates — and whether your funds are adequately protected.

As seen with SVB, yield-chasing can be risky if the underlying institution faces instability.

Investors: Diversify Across Assets

For those with exposure to bank shares, bonds or funds, diversification is key. Avoid over-concentration in one sector or geography. While financial stocks can perform well during certain cycles, they also carry risks during economic tightening or crisis periods.

Keeping a mix of sectors, asset types and regions in your portfolio helps reduce the impact of any single failure.

Could It Happen in the UK?

The UK’s financial system is generally considered one of the most stable in the world, with strong capital requirements and close regulatory oversight. Since the 2008 financial crisis, British banks have been subject to tighter rules, regular stress tests and increased scrutiny of liquidity levels.

That said, smaller banks or specialist lenders could still face pressure — particularly if rates remain high or if a specific sector faces a downturn. While a large-scale failure is unlikely, vigilance remains wise.

Stay Informed, Stay Protected

SVB’s collapse was a reminder that even modern, well-known banks are not immune to failure. For UK residents, the takeaway isn’t panic — it’s preparation. Understand who holds your money, how it’s protected, and what level of risk you’re comfortable with.

By spreading your savings, staying within FSCS limits, and monitoring your financial providers, you can build a layer of protection that helps you sleep better at night — no matter what happens in the headlines.