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.
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.
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.
“Long” and “short” in this phrase refer to the timeframe of a loan.
When a loan is made, the person who borrowed the money has to pay the loan back with interest. The amount they have to pay back depends in part of how long it will take them to pay it back. For example, in normal economic conditions, a 1 year loan might have a 5% interest rate while a 10 year loan might have a 6% interest rate (you might hear about something called the “yield curve” which is just a graph showing the relationship between interest rates and the length, or maturity, of a loan).
Banks can use the difference between those interest rates to make money by borrowing money over short time frames (borrowing short) and loaning it back out over long time frames (lending long).
“Long” and “short” in this phrase refer to the timeframe of a loan.
When a loan is made, the person who borrowed the money has to pay the loan back with interest. The amount they have to pay back depends in part of how long it will take them to pay it back. For example, in normal economic conditions, a 1 year loan might have a 5% interest rate while a 10 year loan might have a 6% interest rate (you might hear about something called the “yield curve” which is just a graph showing the relationship between interest rates and the length, or maturity, of a loan).
Banks can use the difference between those interest rates to make money by borrowing money over short time frames (borrowing short) and loaning it back out over long time frames (lending long).
to simplify it as much as possible without losing the main idea:
banks borrow money (from other banks, mostly) at very low interest rates to cover their day to day cash needs. these loans are very short term, usually only days or weeks in duration.
they lend money (to their customers) at higher interest rates to generate their profits. these loans are longer term, usually months or years in duration.
“Long” and “short” in this phrase refer to the timeframe of a loan.
When a loan is made, the person who borrowed the money has to pay the loan back with interest. The amount they have to pay back depends in part of how long it will take them to pay it back. For example, in normal economic conditions, a 1 year loan might have a 5% interest rate while a 10 year loan might have a 6% interest rate (you might hear about something called the “yield curve” which is just a graph showing the relationship between interest rates and the length, or maturity, of a loan).
Banks can use the difference between those interest rates to make money by borrowing money over short time frames (borrowing short) and loaning it back out over long time frames (lending long).
to simplify it as much as possible without losing the main idea:
banks borrow money (from other banks, mostly) at very low interest rates to cover their day to day cash needs. these loans are very short term, usually only days or weeks in duration.
they lend money (to their customers) at higher interest rates to generate their profits. these loans are longer term, usually months or years in duration.
to simplify it as much as possible without losing the main idea:
banks borrow money (from other banks, mostly) at very low interest rates to cover their day to day cash needs. these loans are very short term, usually only days or weeks in duration.
they lend money (to their customers) at higher interest rates to generate their profits. these loans are longer term, usually months or years in duration.
Banks “borrow short” when they take in (borrow) deposits which need to be returned to depositors in a short timeframe, aka withdrawals. Think checking and savings accounts. They “lend long” in the form of loans to customers that have much longer durations. Think car loans and mortgages. Banks make their money by paying depositors low interest rates (on the borrow), charging higher ones on loans (the lend), and pocketing the difference.
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