Rising interest rates are good for banks until they aren't
. That's what we're seeing with the collapse of Silicon
Valley Bank and sell off in other bank stocks.
Here's the backdrop. Higher rates increase the profitability of
a bank's main business which is to pay lower rates
on deposits than they charge for extending loans. But
when the federal reserve plows ahead with nonstop interest rate
increases like it's done over the past year, problems
start cropping up quickly. Silicon Valley Bank got hit
with a 12 punch. Number one, its customers
, a lot of startups were burning through more cash
because it got harder for them to get funding VC
firms are no longer throwing their money around and when
your customers need cash, you need to have enough
on hand. Banks usually park a big chunk of
their money and super safe investments like treasuries and other
securities. So number two, I was forced to
sell those investments to raise cash to meet all the
withdrawals. Defense rate hikes have pushed bond prices lower
which meant SVB sold the securities at a loss,
the total loss$1.8 billion when SVB announced the loss
, other startups got scared and started pulling their money
out. It was an old fashioned run on the
bank. Big banks may end up the winner.
Here after the great fine crisis, the government imposed
all kinds of capital rules on banks that it deemed
too big to fail. Meaning jpmorgan Chase Bank of
America and their peers are required to have a lot
more cash on hand to meet potential withdrawals. They
even have to ask permission to pay dividends to shareholders
. And now many of those startups are playing it
safe by diversifying where they put their money and opening
accounts at the big banks. Great.