Unless you live under a rock – or, even more unlikely, have a job that has nothing to do with finance or startups – you already know that Silicon Valley Bank (SVB) imploded last week. In this post, I want to discuss in some detail why that happened. As always, there is a proximate and an ultimate cause. As usual, everyone seems to be focused on the proximate cause even though the ultimate cause is much more important and interesting.
In good Austrian economics tradition, I believe that the ultimate cause of SVB’s collapse was maturity transformation (MT), or more specifically maturity mismatch. It turns out, that Mises was correct when he wrote in 1912:
For the activity of the banks as negotiators of credit the golden rule holds, that an organic connection must be created between the credit transactions and the debit transactions. The credit that the bank grants must correspond quantitatively and qualitatively to the credit that it takes up. More exactly expressed, “The date on which the bank’s obligations fall due must not precede the date on which its corresponding claims can be realized.” Only thus can the danger of insolvency be avoided.
When you deposit money in a bank account, you are loaning the bank money. It’s a weird loan because it has zero maturity – that is, you can withdraw your money at any time. Usually, you don’t withdraw your money, in which case the loan is automatically rolled over.