Source: Brownstone Institute
by Craig Pirrong
“Banks fail for three basic reasons: 1. Credit transformation: deterioration in borrower creditworthiness, usually due to an adverse economic shock (e.g., a real estate bust). 2. Maturity transformation: borrowing short, lending long, and then getting hammered when interest rates rise. 3. Liquidity transformation combined with an exogenous liquidity shock, a la Diamond-Dybvig, where idiosyncratic depositor needs for cash lead to withdrawals that exceed liquid assets and therefore trigger fire sales of illiquid assets. The two most notable failures of late — Silicon Valley Bank and Silvergate — are examples of 2 and 3 respectively.” (03/13/23)
https://brownstone.org/articles/where-is-occupy-silicon-valley/