You probably heard that Silicon Valley Bank went into FDIC conservatorship last Friday but you might not have fully understood why.
The short version is that it was a classic bank run. SVB put deposits into long dated Treasury bonds (like 10 years) and when interest rates went up, those bonds lost value. That’s fine if you don’t cash out the bond, you only lose opportunity cost. When the bonds mature, you get your money back and some interest.
But if you have to sell, like if depositors want their money and it’s stuck in a bond, then you take a loss. That’s the short version of what happened.
Now, if you want more juicy details… that’s what today is all about. (also a bit about Silvergate, a crypto-friendly bank that also went under)
Silicon Valley Bank: What Happened? [Stop Ironing Shirts] – “I haven’t watched something like this unfold for 14.5 years, specifically since I was sitting at a hotel breakfast as a young banker watching the news about Wachovia Bank. Fortunately or unfortunately, I’m a bit of a nerd when it comes to banks and many people are asking me questions, so here it goes.”
Crypto Bank Had a Boring Collapse [Matt Levine for Bloomberg] – “Take a bunch of deposits from one industry, invest them in safe but long-dated stuff, and then rates go up, your assets lose value, and your concentrated depositor industry vanishes. But Silvergate’s depositors really vanished, and it is shutting down; Silicon Valley’s story is more “a slowdown in VC funding” and “cash burn at many of its clients.” There is still a lot of franchise value there, which is why it can plug the hole in its balance sheet by selling stock instead of by shutting down.”
What about other banks?
Is Silicon Valley Bank is in trouble.
But is the rest of the U.S banking system?
— Genevieve Roch-Decter, CFA (@GRDecter) March 10, 2023
Finally, here’s a link to a solution if you have a large balance and don’t want to open a lot of bank accounts – IntraFi. Not an endorsement, just mentioning it.