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A bank earns over time, but its depositors may demand payment now.
The bank's business is a timing transformation
A bank funds loans and securities with deposits, wholesale borrowing, and equity. The assets may mature or reprice slowly while the liabilities can be withdrawn or repriced quickly. The bank earns interest and fees while absorbing credit losses, operating costs, hedging costs, capital requirements, and the cost of maintaining liquidity.
That transformation produces several separate conditions. Net interest margin is a spread over a period. Solvency is the capacity of assets and capital to absorb losses. Liquidity is the ability to meet claims when they arrive. Confidence determines how quickly claims arrive and whether new funding remains available.
Rates move assets and liabilities on different clocks
When rates rise, a fixed-rate security generally loses current market value while new loans may reprice sooner than existing deposits. If depositors demand higher rates or move their money, the funding cost rises. If they withdraw, a bank may have to sell an asset before maturity. The sale can crystallize a loss, reduce capital or collateral, and increase the fear that causes more withdrawals.
Credit creates a parallel path. Weaker borrowers produce provisions and charge-offs, which reduce earnings and capital and can make new lending more difficult. A bank can therefore be liquid but less profitable, profitable but illiquid, or apparently well-capitalized while its immediately saleable assets are insufficient for a fast run.
What the Liquidity Coverage Ratio actually says
The Basel III Liquidity Coverage Ratio requires a bank to hold enough eligible high-quality liquid assets for defined net cash outflows over a 30-day stress scenario (Basel's LCR standard). The rule observes a specified portfolio and stress assumption. It does not predict every depositor correlation, market-depth problem, operational failure, or confidence shock.
Holding more liquid assets can protect payment capacity but reduce yield. Hedging duration can reduce rate exposure but costs money and may introduce collateral calls. Diversifying deposits can reduce concentration but may require a different business and pricing model. Regulation changes the feasible balance sheet; it does not remove the trade-offs that produce it.
Silicon Valley Bank shows how the clocks interact
The Federal Reserve's review of Silicon Valley Bank identifies failures in governance, interest-rate risk management, and liquidity risk management (supervisory review). Its executive summary describes rapid growth, concentrated uninsured deposits, rising rates, and the loss of confidence that accelerated the failure (executive summary).
SVB is a documented test of an interaction, not a template for every bank. A bank with diversified retail deposits, shorter-duration assets, effective hedges, credible contingency funding, and different capital may have a different failure path. A large securities book alone is not enough to establish fragility.
What the statements observe—and what they leave out
| Measure | It observes | It does not establish |
|---|---|---|
| net interest margin | the accounting spread over a period | the speed of deposit repricing or a run |
| capital ratio | loss-absorbing resources under defined rules | the cash price of a forced sale |
| LCR | liquid assets against a specified stress | every possible withdrawal pattern |
| loan provisions | recognized expected credit loss | all future losses |
The useful analysis joins duration, hedges, deposit concentration, uninsured funding, capital, liquidity, asset quality, collateral, and supervisory evidence. A ratio is an observation inside a rule; the bank's ability to meet the next claim depends on the conditions outside that ratio too.