My Take: The SVB Fiasco From an Ex-Banker
As the financial world holds its collective breath with the closure of Silicon Valley Bank, it brings to mind the Great Savings and Loan Debacle of the 1980s. During the years from1980 through 1988, 563 Savings and Loans (S&Ls) failed and were closed and that didn’t count all the forced and voluntary mergers. In fact, according to the FDIC, the collective net worth of all the S&Ls in the U.S. was zero. Zero! I saw this debacle from the front lines as I then worked at a bank.
The Root of the Problem
The main reason for the debacle was S&Ls making fixed interest rate mortgage loans. And then the interest rate started skyrocketing. If you think about it logically, a banking institution uses their depositors money along with money they borrow from the Federal Reserve Board (FED) to make loans. The profit from those loans is from the interest rate they charge.
The problem arises when the interest rates go up. If they have fixed loans on their books for 8% and the Fed Rate goes up to 10%, say, they are losing 2% on all the money they are borrowing from the FED and loaning out. That is an untenable situation over time. And it is especially untenable if the rates continue to increase. You can’t call your mortgage borrowers and say, hey, you know that fixed rate mortgage loan I gave you three years ago? Well, that rate you got…
