In March alone there at least 2 bank failures with at least $100 billion in assets: Silicon Valley ($300b) and Signature Bank ($100B)
What is interesting to note is that SVB failed despite being liquid. The trouble was with investment decisions. Since it could not lend out its huge liquidty on hand, it invested in long term bonds (govt and private) at 1.5% The culprit was the high interest rate imposed by Fed whose recent rate was up to 4.75%. It is possible that the rates can go up further
Now there is inverse relationship between bond prices and interest rates. High interest rates depresses long term bond prices Investopedia - inverse relationship between bond prices and interest rates
Now the prices of bonds held by SVB declined in prices and therefore the bank incurred losses, depressing its stock prices. This worried the depositors who went into a bank run SVB had to sell its bonds at fire sale further worsening its PNL
"Bonds have an inverse relationship to interest rates. When the cost of borrowing money rises (when interest rates rise), bond prices usually fall, and vice-versa.
At first glance, the negative correlation between interest rates and bond prices seems somewhat illogical. However, upon closer examination, it actually begins to make good sense.
KEY TAKEAWAYS
- Most bonds pay a fixed interest rate that becomes more attractive if interest rates fall, driving up demand and the price of the bond.
- Conversely, if interest rates rise, investors will no longer prefer the lower fixed interest rate paid by a bond, resulting in a decline in its price.
- Zero-coupon bonds provide a clear example of how this mechanism works in practice
It is possible in the country financia institutions like banks insurance companies, pre need companies and other banks have this dire situation. And may have incurred paper losses further exacerbated by low investment rates and inflation
There is no substitute for good decision and wise management
| Bank | City | State | Year | Assets at time of failure (nominal) | Assets at time of failure (inflation-adjusted, 2021) | Ref. |
|---|---|---|---|---|---|---|
| Washington Mutual | Seattle | Washington | 2008 | $307 billion | $386 billion | [3] |
| Silicon Valley Bank | Santa Clara | California | 2023 | $209 billion | $209 billion | [4] |
| Signature Bank | New York | New York | 2023 | $118 billion | $118 billion | [5] |
| Continental Illinois National Bank and Trust | Chicago | Illinois | 1984 | $40.0 billion | $104 billion | [3][6] |
| First Republ |
