New on FinoLib · Volume I: Global Economy
I have just published a new article on FinoLib, my free finance education library: Bank Regulation, Shadow Banking and Derivatives Explained. It is part of Volume I: Global Economy. Below is a summary of the topic in plain, expert language, so you can follow the idea even before you open the full article.
3.9 Bank Regulation — and the SVB Case Study
The idea in plain words
Regulation, through capital, liquidity, deposit insurance and stress tests, exists so that one bank’s failure does not become a systemic crisis. Silicon Valley Bank, now the third-largest US bank failure by assets, died of duration and liquidity risk, not credit risk.
Key points
■SVB failed on March 10, 2023; about 94% of its deposits were uninsured and its bonds had a 6.2-year duration.
■The Fed’s target range rose from 0–0.25% to 4.50–4.75% between March 2022 and February 2023, 450 basis points in under a year, which cut the value of long-duration bonds.
A closer look
Because banks are so interconnected, so essential to everyday economic life, and so capable of causing widespread damage when they fail, they are among the most heavily regulated institutions in any economy. Regulation exists to prevent individual bank failures from becoming systemic crises.
A worked example
Case Study — Silicon Valley Bank Collapse (March 2023)
The collapse of Silicon Valley Bank on March 10, 2023 — the third-largest US bank failure in history by assets, after Washington Mutual (2008) and First Republic (May 2023) — is the most instructive banking case study since 2008, and it illustrates a fundamentally different type of failure: not credit risk (as in 2008) but duration risk and liquidity risk. The setup: SVB, founded in 1983, primarily served tech startups and venture capital firms. During 2020–2021, when interest rates were near zero and venture capital was flooding into tech companies, SVB received enormous deposits from its clients.
Recap
Regulation (capital, liquidity, deposit insurance, stress tests) exists so one bank’s failure does not become a systemic crisis. Silicon Valley Bank, now the third-largest US bank failure by assets, died of duration and liquidity risk: about 94% of its deposits were uninsured, its bonds had a 6.2-year duration, and a run drained over $40 billion in a day, so a bank that was arguably solvent could not pay.
3.10 Shadow Banking — Finance Outside the Regulated Perimeter
The idea in plain words
Shadow banking, which the Financial Stability Board now calls non-bank financial intermediation, is lending and credit activity outside the regulated banking system. It is huge on the broad measure and much smaller on the narrow measure of bank-like, run-prone activity.
Key points
■The broad measure was 51.0% of global financial assets at the end of 2024, after growing 9.4% that year, about double the pace of banks.
■Money market funds alone held $12.1 trillion.
A closer look
Shadow banking refers to lending and credit activity that happens outside the traditional regulated banking system — performed by entities that function like banks (connecting savers and borrowers, creating credit) but are not regulated as banks. Shadow banking institutions include hedge funds, money-market funds, private credit funds, mortgage REITs, and finance companies.
Recap
Shadow banking, which the FSB now calls non-bank financial intermediation, holds $256.8 trillion on the broad measure but only $76.3 trillion (about 30%) on the narrow measure of bank-like, run-prone activity. It grew partly because tighter bank rules pushed lending, including private credit, outside the regulated perimeter, and the data on it are thin.
3.11 Derivatives — Contracts Built on Top of Other Things
The idea in plain words
A derivative is a contract whose value depends on something else, used to hedge a risk or to speculate with leverage. Headline sizes count the notional amount, but the cost of replacing contracts is only a small fraction of it.
Key points
■A company with a $100 million floating-rate loan that pays 4.00% fixed and receives SOFR (3.87% on October 1, 2026) nets $130,000 for the year; the $100 million itself never changes hands.
■Over-the-counter derivatives had a notional amount outstanding of $844.6 trillion at the end of 2025, 79% of it interest-rate contracts ($669.5 trillion).
A closer look
A derivative is a financial contract whose value is derived from — based on — something else: an underlying asset like a stock, a commodity, an interest rate, or a currency. Derivatives are used both to manage risk (hedging) and to speculate on price movements with amplified exposure (leverage). They are not inherently dangerous — the problem arises when they are used for excessive speculation without adequate capital to cover potential losses.
Recap
A derivative is a contract whose value depends on something else, used to hedge risk or to speculate with leverage. Headline sizes count the notional amount ($844.6 trillion at end-2025), but the cost of replacing contracts was only $22.8 trillion (about 2.7%), and the risk lies in that number and in the counterparties’ ability to pay.
What the full article covers
In the full article I take you through these sections:
■3.9 Bank Regulation — and the SVB Case Study
■3.10 Shadow Banking — Finance Outside the Regulated Perimeter
■3.11 Derivatives — Contracts Built on Top of Other Things
It includes worked examples, a look under the hood at the mechanics, a recap, a reveal-on-click quiz and the official sources behind every figure.
Volume I: Global Economy
Read the full article on FinoLib
The complete article, Bank Regulation, Shadow Banking and Derivatives Explained, with every worked example, diagram, quiz and source, is free to read in Volume I, Global Economy on finolib.com.
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