Silicon Valley Banks Face Interest Rate Risk

03/11/2023 14:56 • Daily Digest • 110 views

On March 11, the bank team of Guoxin Securities Economics Research Institute believed that the problem of Silicon Valley banks this time was that they absorbed a large amount of low-cost deposits during the period of loose liquidity and allocated long-term bond assets, resulting in a significant increase in potential interest rate risk, and the Fed’s interest rate increase exposed the problem. We believe that the problem rate of banks in Silicon Valley will not evolve into a broader crisis, mainly because the company’s problems are relatively independent and there is almost no cross-risk with other financial institutions. For Chinese banks, there is no direct impact.

Guoxin Securities: The probability of the bank event in Silicon Valley will not evolve into a broader crisis event

Analysis based on this information:

The report from Guoxin Securities Economics Research Institute highlights that Silicon Valley banks have been absorbing low-cost deposits during periods of loose liquidity, and allocating these funds towards long-term bond assets. This strategy has resulted in a significant increase in potential interest rate risk, which has recently been exposed by the Fed’s increase in interest rates. The report believes that the problem rate of banks in Silicon Valley will not evolve into a broader crisis, primarily because the problems are relatively independent and do not cross-risk with other financial institutions.

It is critical to understand that interest rate risk arises from a bank’s mismatch between its assets (loans and investments) and liabilities (deposits and borrowings). When interest rates rise, the value of a bank’s assets typically decrease, while the cost of its liabilities increases, resulting in reduced profitability. In Silicon Valley, banks have been taking low-cost deposits and investing them into longer-term bond assets, such as mortgage-backed securities. As interest rates rise, the value of these bonds decreases, resulting in significant losses for the banks.

Despite the potential impact of interest rate risk, the report suggests that the problem will not evolve into a broader crisis. This is because the banks’ issues are independent of other financial institutions, and it does not cross-risk with other firms. This means that the problem is limited to Silicon Valley banks only and will not spread to other financial entities. Therefore, the impact on Chinese banks is likely to be minimal, as there is no direct impact on their operations.

In conclusion, the report from Guoxin Securities Economics Research Institute highlights the significant interest rate risk faced by banks in Silicon Valley due to their investment in long-term bond assets. The report believes that while this issue is limited to Silicon Valley banks, it will not develop into a broader crisis, given the independent nature of the problem. It remains to be seen how Silicon Valley banks will address their interest rate risk, and whether they will shift their investment strategies to mitigate potential losses.

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Silicon Valley Banks Face Interest Rate Risk

Guoxin Securities: The probability of the bank event in Silicon Valley will not evolve into a broader crisis event

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