There is a great deal of puzzlement at present about how it could happen that a bank in California is stormed by its customers virtually overnight. The classic bank run at Silicon Valley Bank (SVB), i.e. the attempt by many depositors to withdraw their money from this bank at the same time, has been stopped by the American authorities with the assurance that no one will lose their deposits, but the uncertainty on the financial markets is great. Other banks with similar business models have lost massively in share value.
There are no real explanations for the events yet. The US Federal Reserve has begun an investigation. The most widespread theory at the moment is that the bank got into trouble because the interest rate on the old government bonds held by the bank (on the asset side) is below the interest rate on newly issued government bonds due to the FED’s interest rate turnaround. The current market value of the old bonds is well below their face value, i.e. below the value at which the loans will be repaid by the government. To attribute the bank run to this, however, is a steep thesis.
First of all, one must realise that even the best asset side does not help in the case of a bank run. If, for whatever rational or irrational reasons, a bank’s depositors go crazy, there is no antidote other than the rapid closure of the bank and, to reassure other investors, state guarantees for all banks. That customers no longer trust a bank because it has too many government bonds in its portfolio that are perfectly safe in the long term but cannot be sold in the short term without incurring losses is not particularly plausible.
The short-term losses only occur when depositors go crazy and the bonds have to be sold quickly. But that does not explain why depositors suddenly panic. The FT rightly points out that the current low valuation of government bonds was known long before the run. I, for one, would not get nervous if I held my money in a bank that had mainly lent to the government but of which nothing else was known to be disadvantageous. Even a bank that has mainly given solid long-term loans to private companies is lost in a bank run, because it can never activate as much money as it would need to pay out all the deposits without huge losses. No financial institution is immune to irrational actions.
Nor is the thesis that the bank could not have paid higher interest on deposits because the government bonds in its portfolio were low-yielding particularly convincing. If there is such a pressure on the bank’s margin, it has to accept the withdrawal of some deposits to other banks by paying slightly lower interest rates. If it does not do that and makes big losses, management has failed. It has nothing to do with the asset side alone.
Result: we don’t know. We don’t know at this stage what caused the panic. As long as we don’t know, speculating about the reasons won’t help. Hopefully, the investigation by the US Federal Reserve will soon shed some light on the matter.