![]() Fearing that a widespread loss of faith would lead to a collapse of the regional banking system, the U.S. At that point, it took a higher authority to restore everyone’s belief in the system. The panic began, at which point investors wouldn’t touch SVB, causing its share price to crash and the regulators to step in. So you join the crowd rushing for the exits.Īnd boy, oh boy, did some of the tech bros scream loudly they were withdrawing all their cash. Once you hear one person has withdrawn all their cash, you think there will be none there by the time you turn up. If only one person skips the line, everyone rushes at once, the door gets crammed and everyone dies. If everyone lines up and exits at a measured pace, everyone can get out of the building before the flames engulf them. Had depositors continued with business as usual, the bank would have been able to keep operating.īut it’s like the scene of a fire. Nobody actually needed all their money, and the bank could reasonably have assumed it would find investors willing to take a share in its eventual profits. This forced the bank to go back to the market to raise share capital to tide it over until its bonds reached maturity. When things began turning south in Silicon Valley last year, SVB’s clients began to need a bit more cash than usual. But if you are forced to sell early, you have to offer a discount. That’s not a problem if you hold them to maturity – the government has already committed to pay you the face value, not the market value, when you redeem the bond. And because of the way bond markets work, when interest rates rise, the market value of bonds declines. Its problem was that those assets were largely long-dated treasury paper. It had assets on its books that were worth more than the portfolio of loans it had outstanding. ![]() A bank run, what had happened at SVB, is essentially a crisis of faith. ![]()
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