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Is SVB the Canary in the Coal Mine?

Although Silicon Valley Bank itself was not systemically important to the US financial system, it could signal more widespread problems that are only just coming into view. Many other banks also have large portfolios of long-dated securities and would incur heavy losses if sold before maturity.

BARCELONA – Should the rest of the world be worried about the collapse of Silicon Valley Bank last week? SVB was the 16th largest bank in the United States, with about $210 billion in assets and a market valuation of $44 billion at its peak. That makes this the second-largest US bank failure (following Washington Mutual in 2008). Although SVB itself was not systemically important to the US financial system, it could be a warning sign. This past weekend, regulators also shut down New York’s Signature Bank, and banking-sector stocks tanked.

SVB catered primarily to start-ups and venture-capital funds, a rather narrow circle of depositors that quickly withdrew $42 billion – about one-quarter of the bank’s deposits – at the first sign of trouble. The run came so suddenly that the Federal Deposit Insurance Corporation (FDIC) was forced to intervene during a weekend. Yet, given that 96% of SVB’s deposits were uninsured, its clients had good reason to panic.

What happened? One might say that this was the unexpected outcome of an apparently prudent decision. The pandemic-era tech boom dramatically increased SVB’s deposits, so it decided to invest a substantial share of that in US Treasury and mortgage bonds. Although these yielded a low return, there was still a profit to be made, because ultra-low interest rates meant that SVB had basically no interest costs on its clients’ deposits.