Banks aren’t supposed to fail. If they did so with any regularity, one of the most critical cogs in our economic machinery—the transformation of deposits (a liability) into loans (an asset)—would just seize up and stop functioning.
We rely on the magic of credit creation for everything from leasing cars to buying homes to funding city budgets. That’s why, when a bank fails, it’s so essential to figure out what happened and ensure the same mistakes won’t be made again.
In the case of Silicon Valley Bank, the lender that failed so spectacularly, the specific cause is easy to see in hindsight. As deposits poured in during the pandemic, the bank bought tens of billions of dollars in bonds just before the Federal Reserve began raising rates to fight inflation. As rates shot up, the value of those holdings suffered huge losses. SVB was in deep trouble.
