Opinion: The banking system is built on the assumption that depositors won't ask for their money at the same time. What happens when that assumption fails?
The entire 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 asset-liability mismatch of banks, which can lead to disastrous consequences for the broader financial system.
NII is a crucial financial metric used to evaluate a bank’s potential profitability, representing the difference between interest earned on assets and interest paid on liabilities over a specific period, assuming the balance sheet remains unchanged. On the other hand, EVE is a vital tool that provides a comprehensive perspective of the bank’s underlying value and how it responds to various market conditions — e.g., changes in interest rates.
Furthermore, SVB found itself in a “too big to fail” scenario, where its financial distress threatened to destabilize the entire financial system, similar to the situation faced by banks during the Continuing the Silicon Valley Bank case, it is evident that Silicon Valley Bank’s exclusive focus on NII and NIM led to neglecting the broader issue of EVE risk, which exposed it to interest rate changes and underlying EVE risk.
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