On Friday March 10, Silicon Valley Bank (SVB) was declared insolvent after $42 billion in deposits were withdrawn in a single day. SVB’s insolvency was due to their failure to hedge against interest rate risk. When the Fed rapidly raised interest rates in order to combat inflation, it not only affected people seeking loans, it also negatively impacted the balance sheets of banks holding long duration securities with fixed interest rates. When interest rates rose, the value of SVB’s fixed interest rate securities fell. The secondary market value of these securities doesn’t matter if a bank can meet its liabilities up until the securities mature, but then SVB was hit with a bank run.
Share this post
Silicon Valley Bank and the Modern Bank Run
Share this post
On Friday March 10, Silicon Valley Bank (SVB) was declared insolvent after $42 billion in deposits were withdrawn in a single day. SVB’s insolvency was due to their failure to hedge against interest rate risk. When the Fed rapidly raised interest rates in order to combat inflation, it not only affected people seeking loans, it also negatively impacted the balance sheets of banks holding long duration securities with fixed interest rates. When interest rates rose, the value of SVB’s fixed interest rate securities fell. The secondary market value of these securities doesn’t matter if a bank can meet its liabilities up until the securities mature, but then SVB was hit with a bank run.