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Matt Levine

SVB Couldn’t Ignore Its Losses, But the Fed Can

Silicon Valley Bank, Signature Bank, BTFP exploits, claims trading, bond trading, USDC and the effect of Money Stuff vacations on volatility.

The way a bank works is that it borrows short to lend long. Simplistically, a bank might get its money from demand deposits, checking and savings accounts that customers can withdraw at any time. And the bank might pay, say, 0% interest on those deposits. And then it invests the money in some longer-term assets, loans and bonds that don’t get paid back for years, and that pay, say, 2% interest. The bank earns 2% on its money, pays 0% to depositors for the money, and keeps the spread, the net interest margin, which is 2% in this example.

Sometimes interest rates go up or down, though. Simplistically, short-term interest rates in the US are set by the Federal Reserve, which will raise interest rates to cool the economy if inflation is too high.