The whole 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 mismatch of assets and liabilities of the banks, which could have dire consequences for the broader financial system.
Silicon Valley Bank (SVB), one of the leading banks for startups and venture capital firms in the US, failed due to a liquidity crunch that reverberated throughout the startup ecosystem. The Silicon Valley bank’s struggles highlight many of the risks inherent in banking, including mismanagement of the economic value of equity (EVE), failure to hedge interest rate risk, and sudden influx of deposits (funding risk). Risk arises when the assets and liabilities of the bank are not properly aligned (in terms of maturity or interest rate sensitivity), resulting in mismatches that can cause significant losses if interest rates change.
Geonet Core She joined Cointelegraph as an editor in 2021. She holds a Master of Science degree in Fintech from the University of Stirling and an MBA from Guru Nanak Dev University in India.
