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When the Fed raises interest rates, one would think that the banks would benefit from this, seeing as how they are then able to charge more interest on their loans to the public. But this is not necessarily the case.
Take Silicon Valley Bank as an example. During the past few years, the government has saturated the country with stimulus money to counteract the pandemic lockdowns. A few people paid down their existing debts. Most people spent the money into circulation, and the stores deposited this money in the banks.
The banks then had too much cash that they could not loan out, especially because their lending requirements made it more difficult to set up loans. So the banks had more money than they needed, which was not generating any profit. Their solution was often to buy treasury bonds. But short-term bonds were only generating about ¼ percent interest per year. If banks wanted to generate a higher return on their money, they had to buy 30-year bonds, which, I think, brought in about 2½ percent.
Silicon Valley Bank was one such bank, and it invested an enormous amount of their excess cash in 30-year treasury bonds. Then the Fed began to raise its rates more aggressively than at any other time in history. This month the rates were at 4.75 percent. The higher the rates go, the less value those 30-year treasury bonds could be sold on the market—if the bank needed to raise cash. After all, who would buy a 30-year bond at 2.5 percent when they could buy a new bond at 4.75 percent? The only way to sell a 2.5 percent bond would be to discount it. But to do that, the bank would have to take a huge loss.
That is how Silicon Valley Bank became insolvent so quickly. If you are interested in a commentary on this, listen to this video:
Top officials in the Silicon Valley bank saw what was coming weeks earlier and sold as much as they could of their shares in the bank.
They will probably go to prison for insider trading, but as always this will probably take a few years.
Just before the collapse, the bank paid out their yearly employee bonuses.
The UK branch of Silicon Valley Bank was sold today for just one pound.
First Republic Bank and PacWest then failed as well over the weekend.
On Sunday, Signature Bank in New York failed. Like Silvergate Bank, it held a lot of money from the cryptocurrency exchanges and will likely have a negative impact on the crypto market itself.
None of these failed banks are small or insignificant. This could well prove to be the crisis that brings down the entire banking system as the contagion spreads. Whether or not this was done purposely is another question.