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Economics Nerd Central/ The Global Inflation Thread
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<blockquote data-quote="How bad boy" data-source="post: 7202938" data-attributes="member: 3028"><p>Looks like Silicon Valley Bank is in serious trouble.</p><p></p><p>When I read the explanations why, it's bleedingly obvious that this has been coming and will be a problem with other banks too. </p><p>Fundamentally, they got a massive influx of deposits in recent years. They put it in Mortgage Backed Securities. </p><p></p><p>Their average yield is 1.56-1.66%. </p><p>The Fed funds rate is ~4.5%</p><p></p><p>The value of those Mortgage Backed Securities has dropped because, well, why would anyone buy them when the (almost) risk free return from the Fed is 3x the return?</p><p>They still owe those deposits back to people who gave them the money. But those deposits have been invested in MBSs that are worth less than they paid for them. Almost 10% less, based on sales on Wednesday.</p><p></p><p>As a result, people are looking at them and thinking:</p><p>"Are they still a viable bank, because their assets are worth less than they owe people in deposits? Hmm, best get my money out of there while I still can"</p><p></p><p>Which means that short term, they may not have enough money on hand to actually pay for all those withdrawals, or maybe hold a fire sale of those MBSs, realise more losses, just to cover the withdrawals.</p><p>That is a bank run. Which is generally considered a bad thing.</p><p></p><p>[MEDIA=twitter]1633956163565002752[/MEDIA]</p><p></p><p></p><p>They tried to fix this by raising $2bn+ in new capital from the market.</p><p></p><p>Their share price dropped off a cliff as a result:</p><p>[MEDIA=twitter]1634177463382077440[/MEDIA]</p><p></p><p></p><p></p><p>About that...</p></blockquote><p></p>
[QUOTE="How bad boy, post: 7202938, member: 3028"] Looks like Silicon Valley Bank is in serious trouble. When I read the explanations why, it's bleedingly obvious that this has been coming and will be a problem with other banks too. Fundamentally, they got a massive influx of deposits in recent years. They put it in Mortgage Backed Securities. Their average yield is 1.56-1.66%. The Fed funds rate is ~4.5% The value of those Mortgage Backed Securities has dropped because, well, why would anyone buy them when the (almost) risk free return from the Fed is 3x the return? They still owe those deposits back to people who gave them the money. But those deposits have been invested in MBSs that are worth less than they paid for them. Almost 10% less, based on sales on Wednesday. As a result, people are looking at them and thinking: "Are they still a viable bank, because their assets are worth less than they owe people in deposits? Hmm, best get my money out of there while I still can" Which means that short term, they may not have enough money on hand to actually pay for all those withdrawals, or maybe hold a fire sale of those MBSs, realise more losses, just to cover the withdrawals. That is a bank run. Which is generally considered a bad thing. [MEDIA=twitter]1633956163565002752[/MEDIA] They tried to fix this by raising $2bn+ in new capital from the market. Their share price dropped off a cliff as a result: [MEDIA=twitter]1634177463382077440[/MEDIA] About that... [/QUOTE]
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