Silicon Valley Bank (SVB) failed because it invested too much in long-term bonds that lost value when interest rates went up. That’s what our accounting rules encourage banks to do. As a consequence, U.S. banks, including some of America’s leading banks, are estimated to have over $600 billion of unrecognized losses on the “underwater” securities on their books.
The accounting rules that encourage risk-taking permit banks to show values for bonds on their balance sheets that are not the real values. Instead, they are the prices that the banks paid for the bonds (called “historical cost”), even if the bonds have decreased in value, as they always do when interest rates go up.
