That's because the bank bought its government bonds before interest rates started going up. When interest rates started going up, the market value of Silicon Valley Bank's bonds went down. It wouldn't be easy to get that money in an emergency. Those billions were now locked up for years. Silicon Valley Bank locked billions of dollars away into 10 year bonds. "So they basically wanted to reach for longer term bonds, because, I think, they felt like what they would get from shorter term bonds was kind of a joke." Risky business
"Basically what happened was Silicon Valley Bank wanted a bigger payout," says Alexis Leondis, who writes about bonds for Bloomberg. You get more yield - a bigger payoff - for that wait. Longer term bonds (like 10 year bonds) typically pay out more at the end than the 3 month or 1 year bonds, which makes sense: Long term bonds mean you agree to lend the government your money for years. But some of these bonds are slightly more profitable than others. The downside? Government bonds don't pay out a lot. US bonds are considered to be the safest investment on the planet.
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Those risks paid off.Īnd Silicon Valley Bank took all of those billions it earned from taking those risks and stowed them into what is supposed to be the least risky investment around: US government bonds.īonds are like a little loan you give the government for 3 months, 1 year, 10 years etc., depending on which bond you buy.Īt the end of that time, the government will pay you back for that loan, plus a little interest. "Its deposit base tripled between 20, with billions and billions of dollars flowing in."Ī lot of those billions had come from all of the risks the bank took, lending money to start-ups and companies that couldn't get loans at other banks. "Silicon Valley Bank was just flush," he says. Many of its tech company customers were raking in money during the early pandemic. Williams says the problem at Silicon Valley Bank really started with its wild success. until it wasn't," says Mark Williams, professor of finance at Boston University and a former bank examiner for the Federal Reserve. "Silicon Valley Bank was a very good bank. That's what happened to Silicon Valley Bank. Try to avoid one set of risks, you can just end up exposing yourself to another. But the bank had money stashed into what's supposed to be the safest asset around. The banking sector has been hammered by the failure of Silicon Valley Bank.
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