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One problem is that the bank has bought the bond with someone else’s money, usually a deposit. You might think that unrealised losses don’t matter.

Many banks used the deposits to buy long-term bonds and government-guaranteed mortgage-backed securities. This vulnerability only worsened during the pandemic, as deposits flooded into banks and the Fed’s stimulus pumped cash into the system. Many years of low inflation and interest rates meant that few considered how the banks would suffer if the world changed and longer-term bonds fell in value.

They encouraged banks to buy government bonds: nobody, after all, is more creditworthy than Uncle Sam and nothing is easier to sell in a crisis than Treasuries. Post-crisis regulations therefore sought to limit credit risk and ensure that banks hold assets that will reliably have buyers. The financial crisis of 2007-09 was the result of reckless lending and a housing bust. But rising interest rates have left the system vulnerable. Fortunately, other banks are much further away from the brink than svb was. But, as svb discovered, if a bank wobbles and must sell bonds, unrecognised losses become real.Īcross America’s banking system, these unrecognised losses are vast: $620bn at the end of 2022, equivalent to about a third of the combined capital cushions of America’s banks. Only very large banks must mark to market all of their bonds that are available to trade. America’s capital rules do not require most banks to account for the falling price of bonds they plan to hold until they mature. Then the Fed raised rates at its sharpest pace in four decades, bond prices plunged and the bank was left with huge losses. When interest rates were low and asset prices high the Californian bank loaded up on long-term bonds.

The high-speed collapse of SVB has cast light on an underappreciated risk within the system.