By definition, “black swans” in the financial world seemingly come out of nowhere – and the collapse of Silicon Valley Bank (SVB) would certainly seem to meet that standard. This was a very specific issue (a drought in the IPO market which led to a tech firm cash crunch) in a small part of the world (Silicon Valley) and ideally would have had implications for just that bank, or at most a few others with exposure to startup tech. Yet because of another issue – the unprecedented speed of the Fed’s rate-hiking campaign – the SVB failure seemed to shake the foundations of the US banking system. This campaign has led to significant mark-to-market losses on the balance sheets of nearly every bank. Yet fears regarding the solvency of the banking system are overblown. Banks routinely face interest-rate cycles and hold large amounts of fixed income assets, sometimes at gains and other times at losses. Default risk is low and losses are immaterial if the assets are held to maturity, as they mostly are.
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