After COVID-19 hit the U.S., bank deposits soared. The pandemic-relief measures—including stimulus payments, expanded unemployment insurance, and Paycheck Protection Program funds—put more money in people’s hands, even as consumer spending fell. At the same time, businesses cut back sharply on spending and investment. The result was a flood of money into the banking system. In 2020 alone, according to the Federal Deposit Insurance Corporation, bank deposits rose by 21.7 percent, the largest increase since the 1940s. The following year, deposits rose by another 10.7 percent. At the end of 2021, total bank deposits were an astonishing $4.4 trillion greater than they’d been just two years earlier.

You might think that would have been a good thing for banks, because it meant they had more money to play with. The problem was that they didn’t have anything useful to do with much of that money. …

Banks, you might say, had been lulled into a false sense of security by years of low inflation and near-zero interest rates: They were operating on the assumption that, for many years to come, inflation would remain quiescent, and interest rates would stay low. Accordingly, banks made what now seems like an obviously foolish decision: taking hundreds of billions of dollars in deposits and putting them into long-term bonds yielding only a couple of percentage points. Now that inflation has returned and the Fed has jacked up interest rates, banks find themselves sitting on piles of bonds that are worth far less than they once were. As a result, their balance sheets are much weaker than they had previously appeared to be.

[There is some legit criticism of wokeness and DEI obsession at SVB, but this is much more of a problem, especially with banks that engaged in more speculative and risky behaviors elsewhere. The upside is that the sudden hit to the balance sheets is likely to produce its own sort of monetary tightening in that these banks will be a lot more reluctant to loan money except under the safest of situations. Jerome Powell noted that yesterday in his press conference, arguing that further rate increases may be unnecessary because of it. — Ed]