The entire banking concept is based on the assumption that depositors will not want to withdraw their money at the same time. But what happens when this assumption fails? The answer lies in the asset-liability mismatch of banks, which can lead to disastrous consequences for the broader financial system.
Silicon Valley Bank (SVB), one of the leading banks for startups and venture capital firms in the United States, failed because of a liquidity crisis that has reverberated throughout the startup ecosystem. Silicon Valley Bank’s struggles shed light on the many risks inherent in banking, including mismanaging the economic value of equity (EVE), failing to hedge interest rate risk, and a sudden outflow of deposits (funding risk). Risk arises when a bank’s assets and liabilities are not properly aligned (in terms of maturity or interest rate sensitivity), leading to a mismatch that can cause significant losses if interest rates change.