SVB collapse: Bank fallout shines spotlight on $620 billion hole in banking sector

Fallout from the Silicon Valley Bank collapse has directed attention to a $620 billion ticking time bomb in the banking system that has the potential to spell doom for the financial system.

SVB’s meltdown was partly caused by a chasm between its assets and what they were worth in the market. Eventually, SVB sold some of those assets, spooking investors and triggering a run on the bank. ‘But SVB isn’t alone, United States banks were sitting on $620 billion in unrealized potential losses at the end of last year, per the FDIC.’

SILICON VALLEY BANK COLLAPSE: U.S. OFFICIALS REPORTEDLY WEIGH BACKSTOPPING DEPOSITORS

That hole illustrates why authorities at the Federal Reserve, Treasury Department, and Federal Deposit Insurance Corporation were so eager to stave off contagion or panic spread from SVB’s demise across the banking sector.

The reason for this predicament is that banks compiled a plethora of bonds and treasuries during times when interest rates were hovering near zero. But now, the Federal Reserve has begun jacking up rates in an effort to combat inflation, which has caused many of those assets to plunge in value.

This is because higher interest rates mean that new bonds accrue higher rates of returns for investors. As a result, older bonds have comparatively lower rates of return, rendering them less desirable for investors and therefore triggering a plunge in the value of older assets.