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Comment by karpierz | Hacker News Reader

The issue is not that SVB has loaned too much to companies that can't pay it back.

The issue is that SVB took in a lot of deposits in 2021-2022, and locked them into 10 year bonds at 2.5% interest. Now in 2023, a lot of their customers are burning money (withdrawing funds) and aren't raising money (depositing funds), and so they need to start liquidating the 10 year bonds.

The issue is that the 2021 bonds are discounted because interest rates have grown since, and they're out some money unless they can hold the bonds to maturity. So they're raising money to bridge the deficit to allow themselves to hold more of the bonds.

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Right, I get the loans don't feature right now, but the reason why depositor behavior is so concentrated is because they're mostly in the same industry affected by the same market forces. To have large numbers of loans out to that same industry at the same time is additional risk, whether or not that particular risk caused problems this time.

EDIT: Elsewhere in the comment thread people have clarified that the bonds are the big problem on the assets side. They had a bunch of low interest rate bonds that now have to be sold at a loss because interest rates are much higher.

Why would they buy 10-year bonds when their depositors are startups, many of whom won't exist in 10 years? Seems like shorter-term T-bills would have been more appropriate, but I know next to nothing about finance.

Because the yield curve is usually upward sloping.

Banks lend for long periods on the expectations that deposits that are withdrawn by some customers are balanced by new deposits from others.

But of course in the current environment there aren't a ton of startups depositing recently-raised funds.

They made a gamble that if they needed to redeem them early that they would be able to do so without much penalty and that they wouldn't need to redeem too much if any (new deposits would cover old assets).

They lost on multiple fronts, interest rates rose so much that it became a huge loss to sell these bonds, the tech market slowed down meaning that fewer companies were getting infusions of cash and more of them were burning through their cash piles and the final death knell was that word of all this got out and it started a bank run.

> They lost on multiple fronts, interest rates rose... the tech market slowed... word of all this got out

The first two are the same thing and the latter is not really an "event" but rather the legally-mandatory observation of the first two? (Unless they want to commit fraud, of course.)

ISTM the issue was that their core product was as shallow as their customers'.

Shorter term bonds typically yield significantly less. Except the past year or so we’ve had “yield inversion” where the shorter term bonds are actually paying out more than long term bonds. This is an indicator of incoming economic downturn as it indicates institutions need cash now and are willing to pay for it.

Right, Talking to some people in the banking industry and the fear is no one know which other banks are in similar situation.

hint: every bank

Most banks dont have the same cash flow in/out profile that SVB are facing thus wont have the same issues.

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