In just a few short days, Silicon Valley Bank (SVB) went from a going concern to being shuttered by US regulators. For those of us who were investing during the Great Financial Crisis, it certainly brings back memories of Lehman Brothers and other institutions teetering on the brink of disaster.

Today the stocks of many regional banks and brokerage firms are getting clobbered as investors flee, taking action now rather than waiting to see what may happen.

It is important to understand that the events driving the demise of SVB (and one other bank thus far, Signal) are a far cry from the events of 2008. SVB suffered a crisis that was brought on by a combination of the rapid rise in interest rates, its clientele, and an unusually large investment portfolio riddled with losses.

All banks are suffering from what Charles Schwab calls "cash sorting." This is the process where depositors look at the rate on their bank balances, realize they are earning a lower-than-market rate, and shift those deposits to higher earning money market mutual funds or short term US Treasuries. With the rapid move up in short term rates over the past year, that differential could be as much as 3-4%, as banks have been slow to raise rates on deposits.

SVB no doubt felt this pinch as well, but in addition SVB catered to venture capital and private equity firms in tech heavy Silicon Valley. Many of their clients were feeling the effects of the current tech slowdown, and they needed capital. As liquidity dried up at the bank, SVB turned to asset sales to free up funds, but had to sell many holdings at a loss due to the unusually large declines in the value of many bonds in 2022. Again, another ramification of the rapid move up in rates in the past year.

The final straw that broke the camels back was a good old fashioned run on the bank. Depositors began to smell a collapse and further exacerbated the woes of SVB by pulling deposits at the worst possible time.

Enter the US Treasury, which in combination with the Federal Reserve and FDIC has agreed to guarantee all depositors of SVB regardless of FDIC limits. They have also rolled out a new Bank Term Funding Program (BTFP) that will allow banks to borrow from the Federal Reserve, using investment assets as collateral, rather than selling investments that may be showing losses.

While it is likely that there will be other banks that suffer the same fate, it is important to note that both SVB and Signal were victims of their own decision making and do not represent the majority of US banks. Sure, it's a tough environment for any bank, but good management of capital and risk is still required for long term survival.