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SVB and Bank Profits

This article in The Economist magazine describes well what happened with Silicon Valley Bank and some other impending bank failures.  It also describes the other side of the banking business, which is getting less attention today. 

The lesson of SVB is don’t borrow long term bonds to back up short term deposits.  But SVB had to invest in so many bonds because it was a lopsided bank.  It had lots of deposits, but it made few loans.  The asset side of its accounts was bonds, because it did not have its own loans made from the depositors’ money in their checking accounts.

The SVB customers were the princes and princesses of America.  The Silicon Valley venture capital billionaires gave them tens or hundreds of millions of dollars for their start-up projects.  They didn’t need to borrow money, because their backers have them everything they needed up front.  So, SVB had no one to lend to from all their depositors’ millions.  Thus, they took these millions and invested in bonds.  This was a reasonable decision given their situation, but it was not typical.  Most small and medium sized banks would take their depositors’ money and lend it out to other people in the community who needed business loans, mortgages, or other types of loans.  Ideally there would be some match-up between community deposits and community loans within community banks.  Normally there would be a kind of constant rollover between assets (loans) and liabilities (depositors’ checking accounts). 

Under this simplified traditional banking system, rising interest rates are a good thing, because most deposits (checking accounts) pay little or no interest, while interest on loans will increase as interest rates in general increase around the country.  A bigger gap between what the bank pays on deposits and what it earns from landing means more profits, not less.  Thus, if things worked as they should, higher interest rates should be good for banks. 

The biggest banks are a special case because they have such big, rich customers, who can turn their business on a dime, like the customers of SVB did.  Thus, the biggest banks have to have stronger provisions against what happened to SVB.  Almost any bank can be destroyed by a bank run, because it will have loaned out a significant amount of its depositors’ money, and thus cannot pay every single depositor if they all want their money at the same time.  But in normal circumstances, not all depositors want all their money at the same time.  Over years, banks learn how much cash they have to keep on hand to meet demands for payment. 

The other thing that the SVB crisis illustrated is how cruel and heartless the billionaires of Silicon Valley are.  The general reaction to the rumors of SVB’s troubles was to get their money and don’t give a damn about their colleagues who also had money in the bank.  It was every man for himself, a feeding frenzy.  Not a good look for people who are supposed to be business leaders.  If you needed to see that Silicon Valley is all about greed and selfishness, SVB showed it.  It was mob rule and survival of the fittest. 


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