As a bank’s deposits go in reverse, it has to sell assets. Once a whiff of issue pops up, large depositors run…“bank run.”ġ3. Large depositors aren’t fully insured by the FDIC - they have an incentive to find HIGHLY sound banks. However, once it starts, game theory kicks in: NOBODY wants to be the last depositor at a bank.ġ2. And if those losses are big enough, it may not have enough money to pay out all depositors.ġ1. Technically, if all the depositors ask for their $ back at once, SVB needs to sell those bonds at the mark-to-market value, crystallizing what could have been a temporary loss. It’s “just” mark-to-market: as long as its liabilities are sticky (ie, depositors leave their money SVB), it will ultimately be fine.ġ0. SVB now has a mark-to-market hole in its balance sheet. Those losses, multiplied through the leverage at SVB, caused a big problem!ĩ. When the Fed raised rates, those assets declined in value… So SVB bought high quality assets, but it bought tons of them with LONG duration at LOW interest rates. If you’re levered 10x, a 10% loss on assets is a 100% wipeout.Ĩ. Remember: banks generally acquire assets by using deposits (liabilities) as the capital source.Īnd banks like SVB are levered 10:1 or more: owing $10+ for every $1 of shareholder equity. When rates rise, fixed income prices fall.Ī general rule of thumb is for every one year of “duration,” each 1% interest rate move impacts the price of the bond by:Ī 1% move on a 9 yr duration bond is ~9% +/- on the bond price.ħ. Rather than make dumb loans, SVB bought assets guaranteed by the US government - Treasuries and MBS.
Deposits were pouring in too fast to lend responsibly. Much of the $ was from VC-backed companies that needed a place to deposit the $ they raised. As mentioned above, from 2019-2021, the deposits tripled! SVB needed to take those funds & acquire “assets” to pay its costs.Ĥ. Upload new template Popular My chandler hugging album Blank View All Meme Templates (1,000s more.
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If a bank can’t lend deposits responsibly, it often uses excess to BUY loans or “securities,” like US Treasuries & Mortgage Backed Securities (MBS)ģ. chandler hugging album Meme Generator The Fastest Meme Generator on the Planet. To pay for the cost of those liabs, banks turn them into assets: lending deposits as small business loans, mortgages, etc. Liabilities cost money……”cost” both to serve those clients (branches, tellers etc ) and any interest the bank pays you on your checking account (deposit).Ģ. When banks accept deposits from clients, they OWE the client that money. How’s that a problem? It sounds great, right?ġ.
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