The March 10, 2023, collapse of Silicon Valley Bank, followed days later bythe failure of Signature Bank, sent shockwaves through financial markets. The cause of their failures was similar in that both experienced dramatic deposits growth in the years just prior to the latest surge in inflation and rates.
As is typical with many banks, much of those deposits were invested in safe investments, including government treasury debt. Historically, banks generate revenue by offering a lower rate of interest to their depositors while collecting a higher rate of interest from the bills and bonds they purchased with those same deposits.
The challenge that these banks failed to anticipate, and which is still a threat to the industry at large, is that while the said bills and bonds are considered safe — in the sense that the U.S. government is extremely unlikely to default on its debts — that does not mean these instruments can’t lose value.
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