It was built over the course of 40 years. It collapsed in a single day.
The businesses who held cash the bank, all recognized that the bank was in trouble when SVB tried to raise capital last week. Realizing that their deposits were at risk depositors tried to withdraw more than $42 billion from the bank, all at once.
For many banks, that actually wouldn’t be catastrophic, but for SVB, it was.
From 2019 to 2021, deposits at the bank tripled. Deposits are liabilities for a bank, so they need to invest them in order to generate a return greater than their deposit rate.
SVB chose to purchase a load of 10-year treasuries, and not enough other assets.
At the time, 10y bonds were a fine choice in theory because bank deposit rates were basically 0, and 10y bonds were paying between 1-2%.
But now that the Federal Reserve raised interest rates rapidly in order to ‘tame inflation’, customers of all banks have begun pulling their cash in order to buy short-term treasuries, which currently pay around 5%.
When rates rose, the value of those 10y bonds fell significantly. That was a recipe for disaster.
We’ll see if other banks or companies run into financial difficultly…
#finance #svb #economics
