What you want, as a bank, is a certain amount of diversity among your depositors. Now you have lost money and look financially shaky, so customers get spooked and withdraw more money, so you sell more securities, so you book more losses, oops oops oops….Īlso, I am sorry to be rude, but there is another reason that it is maybe not great to be the Bank of Startups, which is that nobody on Earth is more of a herd animal than Silicon Valley venture capitalists. So they withdrew their deposits, so you had to sell those securities at a loss to pay them back. But also, when rates went up, your customers all got smoked, because it turned out that they were creatures of low interest rates, and in a higher-interest-rate environment they didn’t have money anymore. Your customers were flush with cash, so they gave you all that cash, but they didn’t need loans so you invested all that cash in longer-dated fixed-income securities, which lost value when rates went up.

“And so if you were the Bank of Startups, just like if you were the Bank of Crypto, it turned out that you had made a huge concentrated bet on interest rates. He’s such a good writer that I will quote, not try to summarize: No Bloomberg subscription? No problem, you can sign up for the email. “This combination of reduced values in investment portfolios and increased pressures from deposit outflows has led to challenges in managing liquidity risk, particularly as selling lower-yielding investment securities at a loss to cover deposit outflows erodes capital.”Įverything you need to know about the SVB collapse is in Matt Levine’s inimitable daily column.

It’s also a good reminder that many workers across all sectors have not operated in such a volatile rising rate environment and education/awareness and scenario planning is critical.

My financial services colleagues have summarised their thoughts on how banks can play both defence and offence as they focus on balance sheet and liquidity risk management, increased stress testing for multiple scenarios and also seek opportunities for organic/inorganic growth.īack to clarity of message, as I tried to explain this over the dining table to my eldest child, born just after the financial crisis, this paragraph was super helpful. While the underlying issues and root causes related to this weeks events in the banking sector are clearly different to 2008, the need for clarity and transparency for investors, customers, employees and other stakeholders remains even more important today.

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