What Happened to Silicon Valley Bank?

Mar 13, 2023 | Macro Insights, No Bull Economics

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Don’t assume that SVB’s difficulties are symbolic of the entire banking industry.

Commentary

Silicon Valley Bank (SVB) made the mistake of investing their customers’ deposits into long-dated U.S. Treasury bonds. Though this would ordinarily be viewed as very conservative by depositors (what asset is more secure?), Fed interest rate hikes took a bite out of the Treasury bond prices in SVB’s portfolio (bond prices move in the opposite direction of interest rates). While this doesn’t represent an actual loss for SVB if they are able to hold the Treasuries until maturity, it became a problem as nervous depositors started a run on the bank, thus requiring SVB to liquidate its bonds at lower face values than what they were initially purchased for.

The U.S. banking system runs on confidence and SVB’s failure represented a poor risk assessment by depositors and a failure of the Fed to take preventative steps to guard against the secondary implications of its rate hike strategy. In any case, the banking sector seems to be in pretty good shape as evidenced by the chart below. The higher the ratio of bank deposits to bank assets, the better, and at the end of February 2023, deposits represented 77% of total bank assets – the healthiest level since 1979.

Deposits/Total Assets Graph
Deposits/Total Assets Graph
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