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Nobody Trusts the Banks Now

Apr 29, 2024

The Fed’s SVB report, Goldman’s SVB dealings, PacWest, Western Alliance, First Horizon and stock buyback rules.

What is going on? I think there are two ways to think about the basic business of banking:

In Theory 1, banking is an inherently risky business model (if the depositors all ask for their money back at once, you are in trouble). Specifically, it is a model with a ton of interest-rate risk. More specifically, if interest rates go up, that’s bad. You got all these short-term deposits and used them to buy long-term fixed-rate assets; when rates go up, your long-term assets lose value and you have to pay more interest on the short-term deposits.