Last week, two major banks collapsed: Silicon Valley Bank (SVB) and Signature. These were the second and third largest bank collapses in US history—the largest being Washington Mutual in 2008. Since I seem to be writing about finance this month, I wanted to try my hand at explaining why, for the reader who doesn’t know anything about finance.
Short answer: SVB placed a big bet long-term US treasury bonds and mortgage-backed securities. However, the prices of these assets went down. Companies with money in SVB were worried about it, so they started withdrawing a lot of money, requiring SVB to sell its assets at a loss until it was wiped out. Bank collapses tend to spread via a process called “contagion”, and Signature appears to be the first victim.
Really long answer: Okay, let’s walk through these concepts one by one.