What does the phrase “banks borrowing short and lending long” mean?
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The stereotypical bank takes money in via floating rates with things like deposits commercial paper and fed funds all floating (the rate on these deposits changes over time) and makes loans with fixed rates (think of a mortgage loan where the rate may be the same for the next 30 years).
Borrowing short is a quick way of noting many of the options available to finance the bank’s loans are done with rates that can differ 1-12 months from today (short term rates).
Lending long means many of the banks loans are at fixed rates (the classic 30 year mortgage but also most bonds, and possibly some of their loans).
At a very, very high level the slope of the yield curve indicates how easy or hard it is to manage a bank, if the yield curve is steep banks generally are making money hand over fist, when it flattens banks cut back on their business, and start considering cost cutting and some may fail. This is how Fed rate changes spread out to the wider national (and global) economy.
That means the bank is vulnerable to making a bunch of loans at some point in time and then while those loans are still active, having the rate they need to pay for deposits rise above the rate they’re earning on the loans. Most banks need to earn a spread or difference between their loans and deposits of at least a couple percent to pay employees, rent and other things.
Now banks have tools like CDs to lengthen their financing rates and can make floating rate loans (like many consumer loans) but as a general rule it’s common for banks to have at least some difference in this, how much and how they manage that risk is one of the main differences between a successful bank and SVB today.
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