Broker Check

On the Mark Special Edition: Banking Crisis Averted, But Risks Remain

March 14, 2023

Why did this happen?

In its simplest form, banks gather deposits from clients (individuals and corporations), and they pay those clients a short-term interest rate. They then invest some of those deposits in fixed income securities, like US Treasuries or mortgage-backed securities. Depending on the duration of their fixed income portfolios, like many investors' fixed income portfolios, some banks experienced substantial market declines during 2022. With a smaller fixed income portfolio, they have less money to repay their depositors, should they want to withdraw their money. If one depositor wants to withdraw their money, it's not really a problem. But if enough depositors want to withdraw their money, you a have a bank run. In the case of SVB, run risk was higher given the depositor concentration with Venture Capital-backed companies. The intersection of these risk can result in liquidity risk, which is at the core of the issue today. 

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