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Silicon Valley Bank was the tip of a banking iceberg
Published Mar 14, 2023 12:27PM ET
Updated Mar 15, 2023 12:40AM ET
Traditional financial institutions take deposits from customers and use them to make loans. But they loan out much more than what they have in store at a given point in time — a concept known as fractional banking. On one hand, the difference between the interest on the loans and the interest paid to depositors is referred to as the net interest margin and determines a bank’s profitability. On the other hand, the difference between the assets and liabilities is referred to as their equity and determines the bank’s resilience to external shocks.
Before the latest run on the bank, SVB was viewed as not only a profitable banking institution but also a safe one because it held $212 billion in assets against roughly $200 billion in liabilities. That means they had a cushion of $12 billion in equity or 5.6% of assets. That’s not bad, although it is roughly half the average of 11.4% among banks.
Christos A. Makridis is a professor and entrepreneur. He serves as the CEO and founder of Dainamic, a financial technology startup that uses artificial intelligence to improve forecasting, and serves as a research affiliate at Stanford University and the University of Nicosia, among others. He holds doctorate degrees in economics and management science and engineering from Stanford University.
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