John Cochrane explains the SVB run this way:
Basically, because it funded a portfolio of long-term bonds and loans with run-prone uninsured deposits. Interest rates rose, the market value of the assets fell below the value of the deposits. When people wanted their money back, the bank would have to sell at low prices, and there would not be enough for everyone. Depositors ran to be the first to get their money out. In my previous post, I expressed astonishment that the immense bank regulatory apparatus did not notice this huge and elementary risk. It takes putting 2+2 together: lots of uninsured deposits, big interest rate risk exposure. But 2+2=4 is not advanced math.
Another way to put it is that those managing the bank, and to some extent the depositors, bought into the notion that the super-low interest rates of the past decade would never go up so there was no reason to worry about large account deposits well above the insured level. But interest rates went up.
These SVB managers and shareholders aren’t alone in having held the belief that interest rates would forever stay low. I had been told many times that we never have to worry about the debt accumulated by Uncle Sam because interest rates were low and would never rise.
Now, we must live with the consequences of interest rates rising in a high-debt environment. Those consequences include: a larger share of the budget going to pay interest on the debt (according to Biden’s budget, some $10 trillion over ten years), higher debt accumulation to pay for those interests on the debt, higher costs (economic and political) for the Fed in its fight against inflation, and more.
Are we ever going to learn to never say “never”?