(conversation)Silicon Valley Bank and Signature Bank Failed at great speed – so fast that they could be textbook cases of classic bank runs, in which many depositors withdraw their funds from the bank at the same time. There were setbacks in SVB and signing Two of the three eldest In American banking history, following the collapse of Washington Mutual in 2008.

How can this be when the banking industry is sitting at record levels? Extra storage – Or more cash held than required by regulators?

While it is the most common type of risk faced by commercial banks A jump in debt repayment – known as credit risk – that’s not what’s happening here. as Economist specializing in bankingI believe it boils down to this Two other big risks Every Lender Faces: Interest Rate Risk and Liquidity Risk.

Interest rate risk

The bank is facing Interest rate risk When rates rise quickly in the short term.

Since March 2022, the same has happened in America. The Federal Reserve has been raising rates aggressively – 4.5 percentage points so far – In an effort to control rising inflation. As a result, loan yields have risen at a similar rate.

The yield on one-year US government Treasury notes Hit a 17-year high of 5.25% in March 2023Less than 0.5% in early 2022. Yield on 30-year Treasuries It has increased by about 2 percentage points.

As the yield on a security increases, its value decreases. And so such a sharp rise in rates over a short period of time sinks the market value of previously issued debt—whether corporate bonds or government treasury bills—especially for long-dated debt.

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For example, a 2 percentage point gain in the yield on a 30-year bond can cause its market value to fall. A decline of about 32%.

SVB, known as Silicon Valley Bank, had the bulk of its assets – 55% – Invest in fixed income securitiessuch as US government bonds.

Of course, interest rate risk is not a big problem in that the market value of the bond declines as long as the owner can hold it until maturity, at which point he can collect its principal face value without realizing any loss. Unrealized losses remain hidden on the bank’s balance sheet and disappear over time.

But if the owner has to sell before the maturity of the mortgage at a time when the market value is less than the face value, the unrealized loss will be an actual loss.

That was exactly the case with SVB Earlier this year its customers faced their own cash crunch and started withdrawing their deposits – while higher interest rates were also expected.

This exposes us to liquidity risk.

liquidity risk

liquidity risk It is the risk that the bank will not be able to meet its obligations without incurring losses.

For example, if you spend US$150,000 of your savings to buy a house and you need some or all of that money to meet another emergency down the road, you are experiencing liquidity risk. A large portion of your money is now tied up in a home, which cannot be easily exchanged for cash.

SVB’s customers were paying back Using their cash reserves to help them pay beyond their deposits, and therefore meet their obligations The bank has decided to sell $21 billion of its securities portfolio at a loss of $1.8 billion. Shortages in equity capital led lenders to try To raise more than 2 billion dollars In the new capital.

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A call to raise equity sent shockwaves To SVB’s customers, who were losing faith in the bank and rushing to withdraw cash. Running such a bank can lead to Even a healthy bank can go bankrupt Some days, especially now in the digital age.

Partly this is due to a lot of SVB Deposits on customers were good $250,000 insured by the Federal Deposit Insurance Corporation – and so they knew their money might not be safe if the bank failed. approx 88% of total were unscathed in SVB.

Signing faced a similar problem as SVB collapsed inspired many of its customers To withdraw your deposit from the same concern on liquidity risk. About 90% of its deposits were uninsured.

Systemic risk?

All banks today face interest rate risk on some of their holdings because of the Fed’s rate-hiking campaign.

This is what happened $620 billion in unrealized losses In the bank balance sheets as on December 2022.

But most banks are unlikely to have major liquidity risk.

While SVB and signature were in compliance with regulatory requirementsTheir asset composition was not in line with the industry average.

was signed More than 5% of its assets in cash and SVB had 7% in comparison Industry average 13%. Additionally, compared to 55% of SVB’s assets in fixed-income securities Industry average 24%.

The The US government’s decision to backstop All depositors of SVB and Signature, regardless of their size, should be less likely to face liquidity crunches due to large withdrawals due to sudden panic as banks with less cash on their books and more collateral.

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However, with Over $1 trillion in bank deposits Currently uninsured, I believe the banking crisis is far from over.


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