Silicon Valley Bank (SVB) and Signature Bank’s collapse are classic examples of bank runs.
It appears that this crisis was due to interest rate risk and liquidity risk.
Interest rate risk occurs when interest rates increase rapidly within a short period.
The Federal Reserve raised rates to combat inflation, causing yields on securities to rise, which led to a plunge in market value. SVB had a large portion of its assets, 55%, invested in fixed-income securities, such as U.S. government bonds.
The issue of liquidity risk arises when a bank cannot meet its obligations without incurring losses. Customers of SVB and Signature Bank withdrew deposits beyond what the banks could pay using their cash reserves, forcing them to sell a significant portion of their securities portfolio at a loss.
These actions led to a loss of confidence in the banks, with customers rushing to withdraw cash, causing a bank run.
So how does this affect you?
Our advice is to stay the course with your financial plan.
Bank collapses can be concerning, but clickbait media takes rarely considers your personal financial situation.
Still have questions? Contact us today to discuss.