This is what the New York Times had to say about Silicon Valley Bank (SVB) or bank runs more generally. In reading this I’m reminded, (I can’t remember where I heard this from – so apologies I can’t credit the author) ‘no-one has found a new way to go broke!’
Another lesson (again apologies I can’t credit the author) – don’t borrow short and invest long, it’s just dumb.
Don’t forget, from a bank’s perspective, a deposit is a liability. To make profits a bank has to use ‘other people’s money’ to create assets and hope it makes a return.
Relevance – this is exactly what some residential builders in fact do.
NYT Said (and here I do have the author’s details – Kevin Roose is a technology columnist and the author of “Futureproof: 9 Rules for Humans in the Age of Automation.”)
“what brought SVB down wasn’t lending to risky start-ups, or gambling on sketchy crypto coins, or some other ill-considered tech scheme. It was an old-fashioned bank run, set off back in 2021 by a series of old-fashioned bad decisions.
That year, the stock market boomed, interest rates sat near zero, and money was flooded into the tech sector. Many start-ups parked their cash at Silicon Valley Bank, and the bank, in turn, took that money and invested it, including investing in a bunch of long-dated bonds. Those investments looked relatively safe at the time but became riskier last year as interest rates rose and the bonds lost some of their value.
This year, as tech investment slowed and start-ups pulled cash out of the bank to pay their expenses, SVB needed to sell some of its bonds at a loss and seek fresh capital to meet its obligations.
The bank may have been able to survive all of this, but when it explained to customers (badly) what had happened, some of those customers got worried that the bank was in trouble. Venture capital investors got spooked, and told their portfolio start-ups to withdraw any money they had sitting at SVB.
Other customers saw that happening, and they panicked, too. Voilà, bank run.