1 What’s wrong with the banks. Rising interest rates have left banks exposed.

Time to fix the

system—again
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3 Only ten days ago you might have thought that the banks had been fixed after the nightmare of
the financial crisis in 2007-09. Now it is clear that they still have the power to cause a
heartstopping scare. A ferocious run at Silicon Valley Bank on March 9th saw $42bn in deposits
flee in a day . svb was just one of three American lenders to collapse in the space of a week.
Regulators worked frantically over the weekend to devise a rescue.
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5 Even so, customers are asking once again if their money is safe. Investors have taken fright.
Fully $229bn has been wiped off the market value of America’s banks so far this month, a fall of
17%. Treasury yields have tumbled and markets now reckon the Federal Reserve will begin cutting
interest rates in the summer. Share prices of banks in Europe and Japan have plunged, too.
Credit Suisse, which faces other woes, saw its stock fall by 24% on March 15th and on March 16th
it sought liquidity support from the Swiss central bank. Fourteen years since the financial
crisis, questions are once again swirling about how fragile banks are, and whether regulators
have been caught out.
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7 The high-speed collapse of SVB has cast light on an under-appreciated risk within the system.
When interest rates were low and asset prices high the Californian bank loaded up on long-term
bonds. Then the Fed raised rates at its sharpest pace in four decades, bond prices plunged and
the bank was left with huge losses. America’s capital rules do not require most banks to account
for the falling price of bonds they plan to hold until they mature. Only very large banks must
mark to market all of their bonds that are available to trade. But, as svb discovered, if a bank
wobbles and must sell bonds, unrecognised losses become real.
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9 Across America’s banking system, these unrecognised losses are vast: $620bn at the end of 2022,
equivalent to about a third of the combined capital cushions of America’s banks (see Finance &
economics section). Fortunately, other banks are much further away from the brink than svbwas.
But rising interest rates have left the system vulnerable. The financial crisis of 2007-09 was
the result of reckless lending and a housing bust. Postcrisis regulations therefore sought to
limit credit risk and ensure that banks hold assets that will reliably have buyers. They
encouraged banks to buy government bonds: nobody, after all, is more creditworthy than Uncle Sam
and nothing is easier to sell in a crisis than Treasuries.
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11 Many years of low inflation and interest rates meant that few considered how the banks would
suffer if the world changed and longer-term
12 bonds fell in value. This vulnerability only worsened during the pandemic, as deposits flooded
into banks and the Fed’s stimulus pumped cash into the system. Many banks used the deposits to
buy longterm bonds and governmentguaranteed mortgagebacked securities.
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14 You might think that unrealised losses don’t matter. One problem is that the bank has bought
the bond with someone else’s money, usually a deposit. Holding a bond to maturity requires
matching it with deposits and as rates rise, competition for deposits increases. At the largest
banks, like JPMorgan Chase or Bank of America, customers are sticky so rising rates tend to
boost their earnings, thanks to floating-rate loans. By contrast, the roughly 4,700 small and
midsized banks with total assets of $10.5trn have to pay depositors more to stop them taking
out their money. That squeezes their margins—which helps explain why some banks’ stock prices
have plunged.
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