Perfect storms occur in batches. It’s never a single event, a single wave. Bank executives, like ship captains, earn their keep during times of upheaval. The good ones anticipate events, examine cause and effect, assess risk, and chart the best course through rough seas.

Silicon Valley Bank grew deposits by $100 billion in a year and a half. That was the first wave in a perfect storm. The problem/opportunity originated from the easy money that the Federal Reserve flooded into the economy (printing $9 trillion via quantitative easing). SVB depositors were high-tech recipients of government spending on ESG and DEI projects. Those deposits are considered hot, subject to withdrawal at a moment’s notice.

SVB’s mistake was to mismatch volatile deposits by investing in long-term bonds. It invested those deposits in 10-year Treasuries that yielded 1.6 percent. Moreover, SVB execs and bank examiners were distracted by meaningless woke activity; they spent more time on social justice than on bank fundamentals.

The next wave was, once again, Fed action. This time, it was interest rates and Fed tightening. The Fed raised rates in 2022 by 4.5 percent in a year. That was way too rapid. It caused an inverted yield curve, thereby squeezing net margins, and caused a massive decline in the face value of bonds. The decline in the value of bonds only matters if a bank has to sell that bond for liquidity purposes. (RELATED: The Fed Has More Than a ‘Credibility’ Problem)

When you operate a bank so close to the edge, as did SVB, it doesn’t take much to push it over the precipice. In this case, it may have been a tweet. The hot deposit owners, the tech giants, got wind of an issue at SVB and tweeted about the alarm. That final nail caused the run that brought them down.

The vast majority of banks and bankers appreciate the dangers of perfect storms and manage their banks in a moderate, balanced, and conservative manner. Don’t be confused by fear into thinking that a lot of banks make the same mistakes as did SVB. Understand the clear (in hindsight) path that SVB took to destruction and realize that bank owners don’t want to suffer the same, and inevitable, consequences for poor management.

Jay Davidson is founder and chairman of a commercial bank he started in 1995. He is an adherent of the Austrian School of Economics and an ardent believer in individual freedom and capitalism.

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