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Can someone ELI5 how the increased interest rates hurt the bank's strategy? I've read a few articles now and still can't parse through the language to understan

Can someone ELI5 how the increased interest rates hurt the bank's strategy? I've read a few articles now and still can't parse through the language to understand what's happening.

jmstfv 4y ago
Roughly speaking: They were holding some candies that became less valuable because you can buy better candies for the same price in the shop. They needed the money, so they had to sell those candies for cheaper. Some friends of theirs noticed they were selling those candies for cheaper and started getting suspicious and panicky and asking for their toys back. * Candies - fixed income securities, like mortgage backed-securities and US treasuries * Candies becoming less valuable - government raising the interest rates, which makes fixed income products, like treasuries and mortgage-backed securities less valuable, because you can get the same securities but with higher returns in the market * Friends panicking - investors and depositors * Friends asking for their toys back - withdrawing money from the bank, which starts the bank run
mandevil 4y ago
Matt Levine's invaluable Money Stuff (free newsletter) did a fabulous job of just that: https://www.bloomberg.com/opinion/articles/2023-03-09/crypto-bank-had-a-boring-collapse https://www.bloomberg.com/opinion/articles/2023-03-09/crypto... was before the FDIC moved in, https://www.bloomberg.com/opinion/articles/2023-03-10/startup-bank-had-a-startup-bank-run#xj4y7vzkg https://www.bloomberg.com/opinion/articles/2023-03-10/startu... was from today.
kentonv 4y ago
Say you buy a bond for $100 with 10-year maturity. This means the bond will pay $100 in 10 years. What is it worth today? Let's say you are looking for an investment to pay 1% yield year over year, because that's the going market rate (which highly correlates to interest rates). Then this bond should be worth about $90.53 to you. You buy it at that price. Now suddenly rates change and everyone is expecting investments to pay 3% year over year. Then an equivalent bond is now worth only $74.41. That's OK. You don't have to sell your bond. You can hold on until it matures, and just live with the fact that you aren't getting the same yield as others. But now imagine you need to come up with a lot of money quickly to satisfy some requirement (like customers withdrawing a lot of money). Now you have no choice but to sell your bond. And that means you have to admit you lost the money. And now you may not have enough money to cover your obligations, even though you would have if you could have waited for the bond to mature.
- kentonv 4y ago
  And the reason SVB had more bonds than most is because there was a huge influx of deposits in 2021 from investors going nuts funding startups, but SVB doesn't have many customers that are good candidates for loans. They needed to do something with the money. So they bought bonds instead, because those are "pretty safe". A lot of bonds.

Can someone ELI5 how the increased interest rates hurt the bank's strategy? I've read a few articles now and still can't parse through the language to understand what's happening.

jmstfv 4y ago

Roughly speaking: They were holding some candies that became less valuable because you can buy better candies for the same price in the shop. They needed the money, so they had to sell those candies for cheaper. Some friends of theirs noticed they were selling those candies for cheaper and started getting suspicious and panicky and asking for their toys back. * Candies - fixed income securities, like mortgage backed-securities and US treasuries * Candies becoming less valuable - government raising the interest rates, which makes fixed income products, like treasuries and mortgage-backed securities less valuable, because you can get the same securities but with higher returns in the market * Friends panicking - investors and depositors * Friends asking for their toys back - withdrawing money from the bank, which starts the bank run

mandevil 4y ago

Matt Levine's invaluable Money Stuff (free newsletter) did a fabulous job of just that: https://www.bloomberg.com/opinion/articles/2023-03-09/crypto-bank-had-a-boring-collapse https://www.bloomberg.com/opinion/articles/2023-03-09/crypto... was before the FDIC moved in, https://www.bloomberg.com/opinion/articles/2023-03-10/startup-bank-had-a-startup-bank-run#xj4y7vzkg https://www.bloomberg.com/opinion/articles/2023-03-10/startu... was from today.

kentonv 4y ago

Say you buy a bond for $100 with 10-year maturity. This means the bond will pay $100 in 10 years. What is it worth today? Let's say you are looking for an investment to pay 1% yield year over year, because that's the going market rate (which highly correlates to interest rates). Then this bond should be worth about $90.53 to you. You buy it at that price. Now suddenly rates change and everyone is expecting investments to pay 3% year over year. Then an equivalent bond is now worth only $74.41. That's OK. You don't have to sell your bond. You can hold on until it matures, and just live with the fact that you aren't getting the same yield as others. But now imagine you need to come up with a lot of money quickly to satisfy some requirement (like customers withdrawing a lot of money). Now you have no choice but to sell your bond. And that means you have to admit you lost the money. And now you may not have enough money to cover your obligations, even though you would have if you could have waited for the bond to mature.

kentonv 4y ago
And the reason SVB had more bonds than most is because there was a huge influx of deposits in 2021 from investors going nuts funding startups, but SVB doesn't have many customers that are good candidates for loans. They needed to do something with the money. So they bought bonds instead, because those are "pretty safe". A lot of bonds.