As an introduction, a question: How do you measure the distance between galaxies? In meters, in kilometers. No! , in light years. How do you measure the size of a US bank? In dollars. No! It is measured in billions of dollars. That is, the unit of measure is 1 $B = 1 billion dollars.
This clarification helps us to understand the bankruptcy of Silicon Valley Bank (SVB), whose size is about 200 $B and its bankruptcy will cost about 20 $B. But first, it is necessary to start with the foundations of the banking business, understanding what a bank is and what risks it assumes in its activity.
Einstein is credited with the phrase: “Compound interest is the most powerful force in the universe”. Whether this attribution is true or false, the compound interest formula offers us an explanation of the 'big-crunch' experienced by SVB in March 2023.

What is a bank?

A bank is a company whose objectives are: to raise money from companies and families to offer it as credit, implicitly assuming the risks of insolvency (customers do not return credits) and liquidity (customers want to withdraw their deposits and the bank does not have enough money).

The usual bankruptcy of banks

A maxim in traditional commercial banking is that: “Banks grow with deposits and die with credit.” Throughout the history of the sector, this maxim explains most bankruptcies: banks that invest clients' money in high-risk transactions, lose it and declare bankruptcy with the impossibility of returning the money to the depositors.
But the SVB bankruptcy has been different. I didn't die because of bad credit, but because of “packing money”.
Can a bank fail by packing money, by packing deposits? Yes, let's see.
To understand the bankruptcy of SVB, it is necessary to understand Einstein's expression in which he states that “compound interest is the most powerful force in the universe” to create (bank big-bang) or to destroy (bank big-crunch).

Understanding the compound interest formula

The compound interest formula appears in books, articles... and forms part of the foundations of financial mathematics. Many use it, but few understand it.
This is the compound interest formula:
Future value = Present value x (1 +% interest) +n years
Einstein, who had a relativistic view of the world, saw in this formula another expression:
Present value = Future value x (1 +% interest) —n years
And this second formula, which fewer people understand, explains the bankruptcy of SVB. Let's go slowly, because Einstein had a privileged mind.
Let's look at an example to understand the compound interest formula:
Let's suppose 100€ at 10% for a year.
Future value = 100€ x (1 + 10%) +1 year = 110€
And the reverse gear?
Driving a car backwards is more difficult than driving it forward (oddly enough, a car usually has five forward gears and only one backward gear).
Present value = 110€ x (1 + 10%) —1 year = 100€
Reader, if you don't understand, I'm sorry. It's the same formula as before, but set back in time.
Intuitively, 100€ after a year at 10% becomes 110€. On the other hand, 110€ after one year backwards at 10% are converted into 100€. Money grows and decreases over time, going forward and backward.
And what does the compound interest formula have to do with the bankruptcy of SVB? As it appears in its name, this bank focuses its activities on Silicon Valley clients, technology companies. The bank experienced spectacular growth in deposits during the years prior to 2023, as shown in the following graph.

Because technology companies had liquidity, their need for credit was small. This emerges in SVB's balance sheet as of Dec. 31, 2022, where:
Deposits = 186 $B
Credits = 70 $B
In this context, SVB's balance sheet has an “unbalanced” structure, with a large amount of deposits (186 $B) compared to a small volume of credits (70 $B).
What can SVB do with a large volume of deposits collected at 0% and that it is difficult for it to place as credits?
The management team meets and decides to invest them in a very safe asset: 10-year American treasury bonds at 2%. A very simple financial math. A balance of 186 $B with an annual spread of 2% gives a margin of 186 $B x 2% = 3.7 $B.
Since what we want to explain in this article is the bankruptcy of SVB and not the specific amounts, we are going to take some round and exaggerated figures to better understand the cause of bankruptcy.
Suppose that, at the beginning of 2021, SVB had $100 B in 0% deposits and invested them in two-year 10% American treasury bonds.
Start of 2022: SVB invests $100 B in 2-year treasury bonds.
End of year 2022: SVB charges 10 $B.
End 2023: SVB would charge $10 B and return the principal 100 $B.
It's impossible to lose money investing in two-year American treasury bonds at 10%. This statement is absolutely false and means that Einstein's expression “Compound interest is the most powerful force in the universe” has not been understood. Forward motion is intuitive and simple, but reverse is less intuitive.
Let's roll back from the 120 $B that SVB plans to have at the end of 2023. A year earlier, customers who see interest rates starting to rise in the US begin to withdraw their money. What can the bank do? Sell your investment in U.S. Treasury bonds at the end of 2022 (one year before their due date, time = -1 year).
And how much is the right to collect 120 $B in December 2023 worth in December 2022? The answer that many readers will find reasonable to this question is 100 $B + 10 $B. But that's not the case.
We have to apply the compound interest formula backwards with the interest rates we have in 2022 and the surprise for SVB is that interest rates have risen to 50% because the Federal Reserve wants to curb inflation.
Let's apply the compound interest formula backwards:
Present value = Future value x (1 +% interest) — 1 year
Present value = 120 $B x (1 + 50% interest) —1 year = 80 $B
To understand this formula, as in cars, let's put it not backwards in time, but forward:
Future value = 120 $B = 80 $B x (1 + 50% interest) +1 year
Then, when SVB wants to sell its Treasury bonds in December 2022, which gives it the right to collect 120 $B in the future (end of 2023), it finds that the markets applying the compound interest formula offer it 80 $Bn, which represents a loss of 20 $B compared to the initial investment in treasury bonds of 100 $B.
Customers are starting to rumor that SVB is losing money and may struggle to return deposits. The first ones withdraw their deposits and make comments on social networks (let's not forget that we are with companies/individuals from Silicon Valley), the next ones follow... We enter a vicious circle that reaches a rate of one million dollars per second. At this rate and considering that SVB had about $200 B in deposits, it's easy to conclude that it had 200,000 seconds left to live, equivalent to two days. Under these circumstances, it is reasonable to expect that the authorities would decide to intervene SVB. Cost of this intervention? About 20 $B.
Now perhaps you understand better why Einstein said: “Compound interest is the most powerful force in the universe”.