BUSI 683 Week 5 DB Forum 3 Example

Discussion Board Forum 3: Thread and Replies

BUSI 683 Money & Capital Markets, Discussion Board Forum 3 (thread and two replies)

Thread by [Student Name]

The forum prompt and the classmates are composites standing in for the course's own; the facts about Silicon Valley Bank come from the Federal Reserve's 2023 review, and the textbook, Scripture and research cited are real; the requirements follow Liberty's public course guide for BUSI 683.

Thread

The prompt asks what bank managers should learn from Silicon Valley Bank. The Federal Reserve's review gives the essential facts. SVB grew from $71 billion to over $211 billion in assets between 2019 and 2021, much of it deposits from technology firms flush with cash, and it invested heavily in long-term securities. When it announced on March 8, 2023, that it had sold securities at a loss and planned to raise capital, depositors withdrew over $40 billion on March 9, and management expected $100 billion more the next day; the bank was closed on March 10 (Board of Governors of the Federal Reserve System, 2023). The review's cover letter calls the failure a textbook case of mismanagement of basic interest-rate and liquidity risk.

Chapter 12 explains both risks. Cecchetti and Schoenholtz (2015) describe the bank's basic bargain, lending long while borrowing short, and how a bank whose assets are longer-lived than its liabilities loses value when interest rates rise, a mismatch that gap and duration analysis are designed to measure. SVB's securities were safe from default, mostly Treasury and agency bonds, but not from interest-rate risk. Each Federal Reserve increase during 2022 pushed the bonds' market prices further under their purchase cost. Under accounting rules for securities held to maturity, much of that loss did not appear in reported capital, but it was real to anyone who asked what the assets would bring if sold.

SVB was not alone in holding losses. Jiang et al. (2024) marked U.S. banks' assets to market for the interest-rate increases from early 2022 to early 2023 and found an average decline of about 10 percent, roughly $2 trillion in total. What made some banks fragile, they showed, was the combination of large losses, low capital and above all a large share of funding from deposits above the insurance limit, money that can leave at once. SVB's depositors were concentrated, connected and mostly uninsured, so when they learned of the losses, each had reason to withdraw before the others. Losses made SVB weak; uninsured depositors who all knew each other made it fail in a day.

Proverbs gives a herder's version of the principle: keep close watch over the state of the animals in your care, since riches can vanish within a season (English Standard Version Bible, 2001/2016, Proverbs 27:23-24). For a bank, the flock is the balance sheet. SVB's managers knew they held long bonds and knew their deposits were uninsured, but they did not act as though the value of either could change quickly.

I would draw three lessons for bank managers. First, measure interest-rate risk on the full balance sheet at market value, including securities held to maturity, and hedge or shorten duration when the exposure grows. Second, treat concentrated, uninsured deposits as less stable funding and hold more liquid assets against them. Third, plan how to communicate bad news, because SVB's announcement turned a weakness into a run within a day. These are basic practices, which is exactly the point of the Federal Reserve's verdict. None requires new regulation; each is a choice a bank's managers and board could have made in 2021, when rates were still low and hedges were cheap. The review also faulted supervisors for not pressing the bank to fix known weaknesses quickly enough, but the first responsibility for knowing the flock lies with those who keep it.

Reply to Ethan

Ethan, you made a clear case that regulators should require banks to hold only short-term securities so that rising rates cannot cause SVB-style losses. I share your concern about duration risk, but your rule would remove the service that makes banks valuable. In the model Diamond and Dybvig (1983) built, a bank insures savers against needing cash early by backing withdrawable deposits with long, illiquid investments, letting savers withdraw when they need to while the economy funds long-lived projects. The same arrangement makes banks vulnerable to runs, which is why the authors argued that deposit insurance can prevent runs that would otherwise happen even at sound banks. Cecchetti and Schoenholtz (2015) make the parallel point in chapter 11: intermediaries exist because they pool savings, reduce transaction and information costs and transform maturities in ways individual savers cannot. A bank restricted to short-term securities would earn little more than a money market fund and could not make 30-year mortgages or five-year business loans without the mismatch you want to ban. The better target is the size of the mismatch relative to capital and stable funding, which supervisors can measure. SVB's problem was not that it held any long-term assets; it was that it held so many of them, funded so heavily by uninsured deposits, without hedging. Proverbs 11:14 links a people's ruin to missing direction and their security to a wide circle of advisers (English Standard Version Bible, 2001/2016). Stronger supervision, an abundance of counsel, seems a wiser remedy than a rule that ends maturity transformation. Would a limit on duration relative to capital satisfy your concern, or do you see a reason it would fail where a flat rule would not?

Reply to Maya

Maya, your thread argued that SVB was a healthy bank destroyed by a panic that spread on social media and group chats among venture-backed founders. The speed of the run supports you: the Federal Reserve's review reports over $40 billion withdrawn in one day, a pace that only fast communication and online banking could produce. But I think the evidence shows the panic needed something real to work with. Jiang et al. (2024) found that across U.S. banks, mark-to-market losses averaged about 10 percent of assets after the 2022 rate increases, and that banks combining large losses, thin capital and heavy uninsured funding were the ones exposed to self-fulfilling runs. SVB had all three. Cecchetti and Schoenholtz (2015) explain in chapter 11 that asymmetric information is central to finance: depositors cannot see a bank's true condition, so when news suggests trouble, they cannot tell a sound bank from a weak one and may withdraw from both. At SVB, the March 8 announcement of a securities loss was that news, and the losses it revealed were genuine. Social media accelerated a run that the balance sheet made rational for each uninsured depositor. A founder with $20 million at SVB and a payroll due on Friday did not need to believe the bank was insolvent; it was enough to believe that others would withdraw first. That is the logic Diamond and Dybvig (1983) described decades before group chats existed. Proverbs notes that the first person to speak in a dispute sounds convincing only until someone cross-examines him (English Standard Version Bible, 2001/2016, Proverbs 18:17). The first story told about SVB, a rumor-driven panic, looks right until the balance sheet is examined. Do you think the same messages would have caused a run at a bank with small losses and mostly insured deposits?

References

Board of Governors of the Federal Reserve System. (2023). Review of the Federal Reserve's supervision and regulation of Silicon Valley Bank. https://www.federalreserve.gov/publications/files/svb-review-20230428.pdf

Cecchetti, S. G., & Schoenholtz, K. L. (2015). Money, banking, and financial markets (4th ed.). McGraw-Hill Education.

Diamond, D. W., & Dybvig, P. H. (1983). Bank runs, deposit insurance, and liquidity. Journal of Political Economy, 91(3), 401-419. https://doi.org/10.1086/261155

English Standard Version Bible. (2016). Crossway. (Original work published 2001)

Jiang, E. X., Matvos, G., Piskorski, T., & Seru, A. (2024). Monetary tightening and U.S. bank fragility in 2023: Mark-to-market losses and uninsured depositor runs? Journal of Financial Economics, 159, Article 103899. https://doi.org/10.1016/j.jfineco.2024.103899