Its pretty simple: Their businesses were built when it was cheap to borrow money. The pandemic caused large inflation. In response feds all around the world have greatly increased prime interest rates. Now their ‘run large deficits to expand’ business model is more expensive and they need to compete against increasingly valuable bonds as a competing source of investment. All of this means they need to aggressively chase improved profitability.
That seems like the reverse. The high rate environment made startups stingy which (along with that one newsletter saying SVB ran out of money) caused the run that killed SVB.
To be fair, SVB kind of did run out of money. They invested heavily into Treasuries, so as rates increased, their investments were devalued, which meant they wouldn’t be able to cover their debts if they sold everything or if withdrawals significantly outpaced contributions.
The banks that remained solvent diversified their investments.
The real cause of this is inflation. The Fed raised rates to combat inflation, and raising rates increases their own rate for borrowing, meaning Treasury yields increase, which means new Treasuries are more attractive than older Treasuries, which means older Treasuries sell for less than face value if not held to maturity. The causes of the rampant inflation are varied and include:
supply chain disruption, which led to increased prices due to COVID-19 related inefficiencies
government stimulus packages, which delayed demand changes due to supply chain disruption
shift in demand patterns due to stay at home orders, and a big shift back once those orders were lifted
a long period of near zero borrowing rates to “stimulate the economy” despite being in a bull market
delayed Fed response due to not wanting to destabilize the economy (end many thought supply chain issues would be short lived)
All of that combined led the Treasury rates to increase faster than most expected, which meant a lot of longer term Treasury investors were left holding depreciating investments.
In short, SVB ran too much risk and were punished for it.
Its pretty simple: Their businesses were built when it was cheap to borrow money. The pandemic caused large inflation. In response feds all around the world have greatly increased prime interest rates. Now their ‘run large deficits to expand’ business model is more expensive and they need to compete against increasingly valuable bonds as a competing source of investment. All of this means they need to aggressively chase improved profitability.
SVB failing caused a lot of this.
That seems like the reverse. The high rate environment made startups stingy which (along with that one newsletter saying SVB ran out of money) caused the run that killed SVB.
To be fair, SVB kind of did run out of money. They invested heavily into Treasuries, so as rates increased, their investments were devalued, which meant they wouldn’t be able to cover their debts if they sold everything or if withdrawals significantly outpaced contributions.
The banks that remained solvent diversified their investments.
The real cause of this is inflation. The Fed raised rates to combat inflation, and raising rates increases their own rate for borrowing, meaning Treasury yields increase, which means new Treasuries are more attractive than older Treasuries, which means older Treasuries sell for less than face value if not held to maturity. The causes of the rampant inflation are varied and include:
All of that combined led the Treasury rates to increase faster than most expected, which meant a lot of longer term Treasury investors were left holding depreciating investments.
In short, SVB ran too much risk and were punished for it.
…how?