We haven't seen such rapid rate of interest-rate increases since 1978, if even then - and if you remember, that triggered the S&L crisis as well as the Mexican/Latin American debt crisis.
Moreover banks are wholly different creatures than they were 45 years ago. Back then there were many more banks, they were smaller, and their assets (I believe) were more diversified.
The present problem isn't one of "credit" its really of duration, or length of the bonds. Banks took all that depositor cash from Covid, and what wasn't loaned, was stored in high-quality treasury bonds.
But as interest rates went from 0.75% to 4.0% on a 10 year note, the market value of that note fell quite a lot. So they are sitting on an asset that has dropped up to 20% in value.
Now their depositors are leaving, looking for higher interest rates, but now also in fear - the banks need to pay those depositors. To do that, they need to liquidate some assets. If they have to sell too much, they run out of equity and become, at least technically, insolvent.
Thanks for the explanation.
What you posted is really only half the story.
SVB went from a $20B bank to a $200B bank in just a few years due to an excess of money from the free flow of funds from the government during COVID.
They had to park this money somewhere. Their leadership chose 1.5% returns over .25% returns.
I know a financial institution who’s leaders were excoriated for low earnings from 2019-2021 because they knew that any money coming in was soon to go right back out and they knew the rates would likely go up at some point. They refused to lock up the new money from the COVID printing press in 10 or 15 year notes. Instead, they held tight at the overnight funds from the Fed. Now they are flush with cash to invest in long term bonds paying over 5 times what they were making during the pandemic.
I’m really surprised that the management of all of these banks was not diverse enough to see this coming.
“Now their depositors are leaving, looking for higher interest rates”
i really think that’s the main reason most depositors are making withdrawals, namely chasing interest rates ... short term U.S. Treasury T-bills are yielding over 5% and buying them on the open market is just a matter of clicking a few buttons on Schwab ...
Great explanation. Thanks.
In addition, the speed of transactions has changed dramatically. I can shift all my assets between my accounts at different institutions with a few key strokes and be cleared in minutes if I pay for wire transfer, or 3 days if I don’t pay the extra. Previously it would take a lot more time and the banks could adjust.