When the Fed pumped $7T into the economy three years ago…the money had to go somewhere. Virtually EVERY financial institution had/has bloated balance sheets due to the rapid influx of deposits. Banks were starved for yield as rates remained stagnantly low. They made as many loans as they could (an entirely different issue, by the way, that nobody is talking about. A lot of fixed rate Commercial real estate deals sitting on balance sheets earning a yield from the 3% days), but eventually had to invest those excess deposits into securities/investments. Add insult to injury, many went out on duration searching for as much yield as possible, extending their average life much further than they typically would.
Then, the rate hikes came. And that usually is OK, and even welcomed, but when you raise rates as rapidly as they have (500 basis points in less than a year), all bets are off. Banks had invested short-term deposit dollars into long term assets, and were/are stuck. Not only on the asset side of the balance sheet, but banks have been experiencing a funding pinch throughout this rate hike due to every Edward Jones office in America offering 5% money. Bankers everywhere are having to think about the liability (deposit) side of their balance sheets for the first time in, well, a VERY long time. Quickly raising their deposit rates in order to retain their deposit base which is funding their low yielding loan/securities portfolios. The squeeze in Net Interest Margin is very real, and earnings are greatly impacted (side note -- especially for 'bread and butter' community banks that can't rely on huge fee income from retail customers. They're a one-trick pony, and when margin is squeezed, they're in a very bad spot). A typical rate increase that takes place over a couple years, is easily managed as securities roll off, your cash flows are consistent, and you reinvest into higher yielding assets.
In SVB’s case, they simply had too much concentration (tech and venture capital) and had a doomsday scenario with a run on their deposits. A much higher risk of that happening when it takes one single industry to get nervous. Having 90% of your deposits uninsured isn't exactly wise, either. Naturally they're flighty, and a social media shitstorm did them in. Honestly, it's a comedy of errors between the depositors themselves, the bankers for not utilizing third part insurers (ICS, CDARS, etc.), and the regulators for not holding them accountable on their loose growth tactics.
The irony of it all is that we can once again blame China. COVID shutdowns were the original domino in the ripple of events that have led us to this point.
*BUT, the Fed sitting on their hands when people were kicking and screaming about inflation back in ‘21, and doing absolutely nothing about it, is what is really challenging banks right now. Their balance sheets can’t adapt as quickly as they have to.
