The Price We Are Paying for Not Managing Interest-Rate Risk Along with Credit Risk


The Great Financial Crisis of 2008 is still fresh in society’s memory. Banks have since learned their lesson and avoided taking on too much of credit risk, but still were exposed to risks by manipulating interest rates. This “hot potato” style of risk management has created a difficult situation in the U.S. economy. Home owners, who refinanced their houses with cheap mortgages, and those who bought treasuries and bonds at near-zero interest rates, have seen the value of their assets depreciate significantly.

Silicon Valley Bank (SVB) is an extreme example of what many US banks may soon face. SVB was flooded with deposits from its customers and venture capital firms, most of which were invested in long-term bonds with yields at around 2.5%. But when the pandemic hit, and venture capital firms had to adjust their expenses, deposits were quickly withdrawn. In order to recover their money, SVB had to sell their long-term bonds with a 10% loss, draining their equity quickly and leading to bankruptcy.

Banks will continue to feel the pinch if inflation and interest rates remain high. Deposits, which were once a cheap funding source, will become costly if the investor starts to expect more return on their money. Banks’ ability to lend will suffer as their equity and earnings are diminished. This has a significant impact on the economy as a whole, resulting in higher costs for consumers when it comes to financing vehicles, factories and more.

Regarding the company Silicon Valley Bank (SVB), it is a veterans in the banking industry. Founded in 1983, the bank offers a range of services to its customers, such as private, business and corporate banking services. The bank also specializes in venture capital, technology and private equity. Recently, due to the worldwide health pandemic, the company has been pushed to the brink and has filed for bankruptcy.

Vitaliy Katsenelson is an accomplished investor, author, and CEO and Chief Investment Officer of Investment Management Associates, Inc. He holds a Bachelor of Arts in economics, an MBA in finance and an MS in accounting, and has over 25 years of experience in money management. He is the author of two books, Active Value Investing and The Little Book of Sideways Markets. Katsenelson’s insights on investing in inflationary times are renowned and his podcast on the topic proves to be a popular choice. His main goal is to help investors gain a better understanding of the global markets, so that they can make informed decisions when investing.