Banking Industry

As we’ve seen in the last few weeks, the banking industry has been under fire after the sudden collapse of Silicon Valley Bank and the dominoes that followed. Many things led to this, including large amounts of deposits during the pandemic from the booming tech industry, an extremely aggressive approach in interest rate hiking from the Fed to ease inflation, risk management lapses, and a lightning-fast bank run due to the ease of spreading concern via various media channels. 

After an influx of deposits, Silicon Valley Bank used long-term treasuries to get a better return on cash deposited with them.1 Treasuries are often seen as a risk-free asset or help determine the ‘risk-free’ rate a portfolio manager might compare returns to. This is a misnomer due to the interest rate risk on treasuries – especially longer-term bonds that carry more duration risk.2 

Pension plans and institutional accounts often have mandates in their IPS to balance the duration of their assets and liabilities in a process called immunization. Duration is how long it takes for an investor to be paid by a bond’s total cash flows.3 In this context, it is better seen as the change in the price of assets and liabilities to changes in interest rates. If balanced through immunization, assets and liabilities should fall in line, and the funding status should4 remain somewhat constant, which is why that is often in the IPS of pensions. 

Banks don’t always have a great idea of when liabilities are coming due since depositors can ask for their money at any time. This uncertainty makes immunizing their liabilities improbable and increases the need for much of their assets to be short-term investments. There are liquidity coverage ratios that they must abide by. Still, in the event of a run or similar stress test scenario, smaller banks have a more challenging time withstanding the liquidity needs. With SVB, this was exacerbated by the situation where many of their depositors were in the same industry and socially connected. When word spread that the unrealized loss in their long-term investments was prompting them to attempt to raise more capital, depositors got spooked and requested over 40 billion in a short time, causing the bank’s collapse.5 

What this means for the banking industry is still uncertain. Recently we’ve seen some consolidation and forced sales in the industry. I don’t know how much this will continue, but I imagine it will affect banks with similar risk-management lapses in the face of telegraphed interest rate increases by various central banks across the globe. In the US, I believe the government is working hard to sure up confidence in the banking industry through a lending program to help banks meet short-term liquidity needs6 and the fact that the FDIC insured all of the deposits at SVB and Signature Bank.7 That said, Treasury Secretary Yellen said this doesn’t mean all deposits are not completely insured, although she also mentioned that similar steps could be taken in the event of increased risk of contagion.8 I see this as the US trying hard to maintain confidence in the banking industry to prevent more runs in the near future. I wouldn’t be surprised to see proposals for new regulations or intensified bank stress testing requirements. 

I’ve heard commentators say they feel the Fed will keep hiking rates to slow down inflation until they break something. While Powell has since announced another 25bps hike, I think this will need to be in the back of his and other Fed Commissioners’ minds when discussing further hikes. As of now, many of their projections align with how they felt in December in terms of the Federal Funds rate outlook by the end of the year. I’ll be interested to see how that evolves next quarter. If this teaches us anything, we must continue to assess and mitigate risks for ourselves, our businesses, and our clients.


[1] Procell, C., & Padilla, R. (2023, March 14). Silicon Valley Bank collapse explained in graphics. USA Today. Retrieved March 27, 2023, from

[2] Jamali, L. (2023, March 16). What is “duration risk”? (and how did it get Silicon Valley Bank into trouble?). Marketplace. Retrieved March 27, 2023, from

[3] Hayes, A. (2023, March 19). Duration definition and its use in fixed income investing. Investopedia. Retrieved March 27, 2023, from

[4] Recent evidence suggests the use of derivatives in immunization strategies can lead to trouble in the event of rising yields and properly hedging duration risk should be more than a passive mandate:

[5] Chappatta, B. (2023, March 11). SVB’s 44-hour collapse was rooted in treasury bets during pandemic. Yahoo! Finance. Retrieved March 27, 2023, from

[6] Federal Reserve Board announces it will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors. Board of Governors of the Federal Reserve System. (2023, March 12). Retrieved March 27, 2023, from

[7] Timiraos, N., Ackerman, A., & Duehren, A. (2023, March 14). SVB, Signature Bank depositors to get all their money as fed moves to stem crisis. The Wall Street Journal. Retrieved March 27, 2023, from

[8] Duehren, A. (2023, March 22). Yellen says U.S. could move to protect deposits at other banks. The Wall Street Journal. Retrieved March 27, 2023, from

Ben Tiller

Director of Advisory Services