Silicon Valley Bank (SVB) was the 16th largest bank in the US. It catered specifically to tech companies and startups, meaning that many of SVB’s depositors were startup companies.
Tech boomed during the pandemic. This resulted in SVB’s clients depositing large amounts of money. Between the end of 2019 and the first quarter of 2022, deposit balances at SVB more than tripled to $200 billion.
Banks are traditionally known for accepting deposit inflows and to give out loans with this money. Deposits make up the liabilities, and loans the assets on a bank’s balance sheet.
With loan demand weak, only a small part of deposits was used for loans. The rest of the deposits also had to be put to work. SVB decided to invest it into bonds (long-term US treasuries and agency mortgage-backed securities).
US treasury securities are low-risk investments that pay out a fixed rate of interest until the bond’s maturity. At maturity you get your principal investment back. When interest rates in the market change, the market value of these securities also changes.
This is because the interest rates of new bonds result in older bonds trading at a discount or premium to be able to provide a similar return…
