Larry Summers Says Silicon Valley Bank Made ‘One of the Most Elementary Errors in Banking’

Photo of author

Silicon Valley BankThe nation’s 16th largest bank failed because its managers made a textbook mistake, according to former Treasury Secretary Larry Summers.

Summers, a Harvard University professor who served in both the Clinton and Obama administrations, said Monday that the bank “committed one of the most Elementary Errors in BankingBorrowing money in the short term and investing it in the long term.

SVB collapsed on Friday after depositors ran into the bank, which did not have the cash to cover their withdrawals. It was the second largest bank failure in US history and the largest since the collapse of Washington Mutual in 2008.

What happened was quite simple: When interest rates were historic lows, SVB invested depositors’ funds in long-term Treasury bonds. But as the Federal Reserve raised interest rates to combat inflation, the value of those bonds plummeted, taking the SVB along with it.

Mortgage rates plummet amid Silicon Valley bank collapse

“When interest rates rise, the assets lose their value and put the institution in a problematic position,” Summers explained on Twitter.

On Wednesday, SVB posted a post-tax loss of $1.8 billion as it seeks to address its liquidity crisis by selling equity, The move backfired – in just 24 hours, SVB lost than $160 billion in value and scared off depositors, who rushed to withdraw their money before the situation worsened.

Silicon Valley Bank collapse: Here’s who benefited from their executive, PAC donations

Regulators stepped in on Friday, when federal deposit insurance corporation took over the bank. The SVB had $209 billion in assets and $175.4 billion in deposits the end of 2022, the FDIC said in a statement. This guarantees that the insured deposit, up to the statutory limit of $250,000, will be made available by Monday.

See also  Crypto Lender Celsius's Purchasers Face Lengthy Wait Over Destiny Of Their Cash

The FDIC created a new entity called Silicon Valley Bank NA, and moved all SVB deposits where depositors can access their money.

Fed halts auction for failed Silicon Valley bank, moves to protect uninsured depositors

A Silicon Valley Bank logo is displayed on a smartphone.

East fannie mae Reuters reported that head Tim Mayopoulos was appointed CEO of the new Bridge Bank.

“I look forward to getting to know Silicon Valley Bank’s clients… I also come to this role with experience in these types of situations,” Myopoulos wrote in a to clients. “I was part of the new leadership team that joined Fannie Mae in the wake of the financial crisis in 2008-09, and I served as CEO of Fannie Mae from 2012-18.”

In an interview on CNN, Summers called for increased supervision and regulation of the banking industry.

“It does not appear on the present facts that a very good job was done of regulating and supervising Silicon Valley Bank,” he said.