Traditional financial institutions take deposits from customers and use them to make loans. But they are lending far more than they have in store at a given time – a concept known as fractional banking. On the other hand, the difference between the interest on loans and the interest paid to depositors is referred to as the net interest margin and determines the profitability of the bank. On the other hand, the difference between assets and liabilities is referred to as equity and determines the flexibility of the bank in the face of external shocks.
Before the bank’s last run, SVB was seen not only as a profitable banking institution, but also as a safe one because it had $212 billion in assets against nearly $200 billion in liabilities. This means they have a reserve of $12 billion in equity or 5.6% of assets. That’s not bad, though, about half of the 11.4% average among banks.
Christos A Macridis Professor and businessman. He is the CEO and founder of Dainamic, a fintech startup that uses artificial intelligence to improve forecasting, and serves as an affiliate researcher at Stanford University and the University of Nicosia, among others. He holds a Ph.D. in economics, management science, and engineering from Stanford University.