Silicon Valley Bank Collapse
Doug and Eric Loftus recently sat down to discuss current headlines in the banking industry as we have received a lot of questions from our clients about it. One of the bigger concerns is in regards to recent news surrounding Silicon Valley Bank in California which was taken over by the FDIC and the state of California a few days later.
The primary cause was a duration mismatch in a rising rate environment. This means that the bank had invested deposits into various assets with varying terms or durations until they returned their full value. If too many depositors withdrew their money before the term of the assets were up, the bank couldn’t turn those assets into cash to cover the withdrawal without incurring a loss.
Is This Anything Like the 2008 Financial Crisis?
News of the issues at Silicon Valley Bank caused a run on the bank with $42 billion being withdrawn in a short period of time, which led to the bank’s insolvency. Social media caught wind of the situation and spread like wildfire, leading to additional concerns of another 2008. However, the current situation is not quite like the 2008 financial crisis where credit quality was the primary issue. Instead, the banking industry is facing a duration problem where banks invest deposits into various assets, and if everyone demands their money back at the same time, the bank can’t turn those assets into cash quickly enough.
The Fed’s Response
To address this issue, the Federal Reserve has created the bank term funding program. This program will allow banks to deposit their assets with the Federal Reserve and receive the full value of the asset, even if the current market value is lower. This will give banks time for the values to normalize and prevent potential contagion in the industry.
While the banking industry does have some concerns, the Federal Reserve is taking steps to address the duration problem, and we will continue to monitor the situation and keep our clients updated.
To hear their full conversation, watch the video above. Please reach out with any additional questions.
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