The Banking Crisis


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Silicon Valley Bank’s failure on Friday afternoon left the business and financial industries scrambling in uncertainty. Many companies who had tens or hundreds of millions of dollars on deposit spent the weekend planning what they would do next.
The depositors have been bailed out.  Assurances by  Treasury Secretary Janet Yellen, Fed Chairman Jerome Powell, and FDIC Chairman Gruenberg have been provided and can be found here: and in a statement by President Biden


1.   SVBs deposit base is over-represented by small companies funded with venture capital, many with no or negative cash flow
2.  In the past, the typical venture company was able to access liquidity through direct lending, leveraged loans and high yield offerings
3.  The lending market was inactive in 2022, so instead of drawing on those sources, venture companies were drawing down their deposits at SVB
4.  This caught SVB by surprise, and they were forced to sell Treasury bonds and government guaranteed mortgage backed securities
5.  When they reported a big loss on those Treasury and mortgage holdings, the market, and many of their depositors removed funds from the bank in anticipation of SVB not being able to make good on deposits, and with FDIC insurance only covering up to $250,000
6.  This led to a bank run and forced SVB into receivership. 
It later became known that SVB did not adequately manage their interest rate risk, hoping to ride out higher rates and simply wait for their fixed income securities to mature.  This resulted in their unrealized losses swamping the available capital, and put it far below adequate levels of capitalization compared to its peers.  SVB also had a far greater percent of deposits beyond $250,000 (uninsured by FDIC) making it more vulnerable to a bank run.


The FDIC, Treasury, and the Fed issued a joint statement Sunday afternoon stating that they would backstop every single depositor at Silicon Valley Bank, regardless of the deposit amount. This move has been celebrated by majority of people, and it likely will help mitigate a wide-spread bank run, but there is a lot to unpack in what they just did.

First, the rescue package for Silicon Valley Bank is only for depositors. The equity and bond holders are being wiped out, which is exactly what should happen. Those who end up on the wrong side of a trade ought to lose. That is precisely how markets work.
Second, the government also shut down Signature Bank on Sunday and put it in receivership. It is unclear why they did this, but the joint statement ensured that all depositors of that bank would be treated the same way. All equity and bond holders will also lose in the Signature Bank situation.

Third, every depositor will have access to their funds starting this morning, Monday, so the risks of a bank run have been drastically reduced. This doesn’t stop customers from going to their regional banks and withdrawing their funds, but it will hopefully disincentivise them from doing so.

An important part of this component is that the money used to cover depositors will not come from taxpayers. The money is instead coming from a fund that banks have been paying into for the last few years for this type of emergency situation. It is a de facto insurance program for banking crises and seems to be working as intended.
Fourth, the Fed and others are providing a massive, multi-billion-dollar bailout to the entire banking industry. The government is going to allow banks to post collateral, mainly Treasuries, as collateral to borrow against, but they will be able to use the par value of the asset rather than the market value.


This difference between nominal (par) value and market value is at the heart of the current crisis. For 4 decades, interest rates declined from the high teens to zero. Interest rates and market value of bonds move inversely. This see-saw effect resulted in 10 year Treasury Bonds being both secure and profitable over that period, driven largely by the declining interest rate environment. Bankers were rewarded for making a cardinal error – taking in short term deposits and making long term investments. As often happens, imprudent decisions can work for long periods – until they don’t.


Primary responsibility for the situation must be placed on the Federal Reserve. They held interest rates at 0% for too long and stated repeatedly that they would not aggressively raise rates, by having forward guidance suggest less than 0.5% interest rates months and years out. They reversed course suddenly and dramatically, increasing interest rates by 4.5% over the past year. They also made a wrong call on inflation, describing g it as “transitory” when in fact it had already become embedded.  This created a $200+ billion hole of unrealized losses on bank balance sheets.

The portion of the population that believes everything just changed is not exclusive to bank depositors. Investors across Wall Street are now predicting that the Fed will stop hiking interest rates beginning with the March meeting. If that is true, the banking system will have more breathing room to resolve their unrealized losses, and equity markets will have reason for some relief if rates may be less of a headwind for returns.