Re:FDIC Takes over Silicon Valley Bank
by chernevik on Friday March 10, 2023 @01:48PM
(#35099065)
The whole point of a bank is maturity conversion, the transformation of short-term deposits into long-term loans.
It generally works because while any one depositor's funds are short term, the pool of such deposits is generally stable. A good chunk of today's deposits will fund tomorrow's withdrawals. Banks also have elaborate instruments like commercial paper and the Fed discount window to cover short-term liquidity gaps. A bank with assets it can't sell quickly enough can generally borrow briefly from some other bank to cover the term gap. But there is a limit on how much such borrowing a bank can do, and SVB has hit it.
It seems that SVB made a classic mistake of putting a lot of "hot" money into long-term assets, thus taking on interest rate risk. They probably should have put the surge of deposits into shorter-term instruments, but that would have forced them to reduce interest on deposits or their own profits.
It generally works because while any one depositor's funds are short term, the pool of such deposits is generally stable. A good chunk of today's deposits will fund tomorrow's withdrawals. Banks also have elaborate instruments like commercial paper and the Fed discount window to cover short-term liquidity gaps. A bank with assets it can't sell quickly enough can generally borrow briefly from some other bank to cover the term gap. But there is a limit on how much such borrowing a bank can do, and SVB has hit it.
It seems that SVB made a classic mistake of putting a lot of "hot" money into long-term assets, thus taking on interest rate risk. They probably should have put the surge of deposits into shorter-term instruments, but that would have forced them to reduce interest on deposits or their own profits.