by Peter Zeihan on March 15, 2023

No, we’re not headed for another financial crisis…although, to those with more than 250k in one of the three failing banks, it may seem like we are. Silicon Valley Bank is the largest of the three, but it’s still only the 16th largest in the nation.

The problem for Silicon Valley Bank and the smaller Silvergate and Signature Bank is that they all took on a questionable amount of exposure to illiquid assets. For SVB, it was a variety of long-term bonds and securities with long durations. Then interest rates started to go up–way up. And SVB was not left with many tools to manage interest rate risk it had not hedged for. When its primary customers–the tech industry–found out, they sounded the alarm. Being the tech world, they’re all relatively well-connected and active on social media, triggering a stampede of customers wanting to pull their cash out more or less simultaneously, or what we’d call a good old-fashioned bank run.

The real thread connecting all of these banking mishaps, however, is one that’s not going to go away anytime soon. Rising capital costs. Many of these banks and their customers have been operating in a world where money has been as close to free as it has ever been in human history. Over the past year, we’ve seen interest rates rise–sharply–and there’s little reason to believe that we’re anywhere near done yet. The fundamental operating paradigm for banks and the financial paradigm of the past decade and a half is shifting, and we’re going to see which financial institutions are able to deal with the change and which ones won’t be able to keep up.

The Biden administration has now stated that the FDIC will make all depositors whole. That’s great for ending any potential bank runs, but those CFOs who thought it was a good idea to put all of their company’s capital into one bank won’t be learning their lesson this time around.

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