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[quote=Anonymous][quote=Anonymous]It is helpful to look at sources of banks' funds and uses of those funds.

Simplified below

Sources of funds: 
Deposits.  These can be time time deposits but mostly they are demand deposits, which means the bank does not know when depositors may wish to withdraw their money but can model it based on past patterns.  Since demand deposits can be withdrawn at any time, they typically pay de minimis or no interest.  Time deposits, which are locked in for a certain period of time do carry interest, the amount of which is determined by yield curves.  Usually, but not always, shorter terms pay less interest than longer terms.

Debt: This is usually sourced from bond issuance and will pay an interest rate that is a function of their maturity and market perceived credit quality of the bank (the greater the perceived credit risk, the higher the rate)

Equity: This comes from people who buy common shares in their bank because they believe the bank will provide reasonable returns given their risk tolerance.  Equity is perpetual--it never needs to be paid back.  Return is provided via dividends, higher stock price owing to good prospective earnings and the like.

Uses of funds:

Loans: Banks lend the money to individual and businesses so that they can buy houses and cards, expand their plants, etc.  These loans will be for a fixed term and may be for a fixed rate or a floating rate.  Floating rate is good for banks because if they have to increase rates on deposits they are not stuck with low fixed rates on loans.  However, for many reasons many customers prefer fixed rates.  So, banks will determine the loans rates based on terms, fixed or floating, and credit risk of borrower.  They also price in a spread over what they are paying for their sources of funds so they can make a profit.

Securities: Banks holds these for a variety of reasons.  Unlike loans they can be sold very quickly in case they need to raise cash to meet depositors demands for cash (liquidity demands).  They may not see good lending opportunities so they park funds in government securities.  Buying a a government security is like making a loan to the government and the return will depend on maturity of the security and the shape of the yield curve, which in turn is affected by inflation expectations.

Other things: Premises, equipment etc.

Banks may also seek out businesses that are not dependent on interest rates, mostly commissions from ancillary services like custody and wealth management.  Interest rate risk management and maintaining liquidity can be complicated given demand deposits, guessing about future interest rates, etc. (SVB clearly was unable to do this well.)

How SVB comes into this: They were awash in deposits as their tech company customer base had plenty of venture capital shoved at it.  Many of the depositors and customer base did not need loans, so SVB had relatively few.  They parked most of their funds in government securities.  In order to generate earnings, they went for higher paying long dated government securities. But by locking in and not actively trading them, they were stuck with low paying long dated securities as interest rates were rising.  The value of those securities as a result went down, but for some technical accounting reasons they did not have to realize those losses in earnings.

When venture capitalist funding for fintechs started to dry up, the tech company depositors started withdrawing deposits.  SVB had to sell some securities, realizing their embedded losses and decided to raise capital to fill the hole.  The planned capital raise drew attention to the embedded losses on the rest of the securities and questions arose about its viability.  The deposit withdrawals accelerated and it became clear that under run conditions, SVB would have to sell large amount of securities, taking very large losses and would no longer be a viable institution.
[/quote]

+1  This is an accurate account.[/quote]

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