No. of Recommendations: 16
As usual, rationalwalk has a cogent perspective on the fall of SVB Bank and its implications.
https://rationalwalk.substack.com/p/the-fall-of-si...Long story short:
SVB went to longer maturity U.S. treasuries to reach for yield, but as interest rates climbed further then these longer duration bonds took a hit when marked-to-market:
"It is important to emphasize that there is no evidence that the bank's management did anything that was not permitted by accounting and regulatory standards. The situation was disclosed in the 10-K published just two weeks ago!
SVB's investments were predominantly high quality mortgage-backed securities ' that is, high quality from a credit standpoint. However, like all fixed-income securities, these investments declined precipitously due to rising interest rates. At the end of 2022, the HTM (held to maturity) portfolio had large unrealized losses ...
A bank that is managed as an ongoing entity and retains the confidence of depositors can be expected to grow over time rather than shrink. In contrast, a bank that loses the confidence of depositors will suffer withdrawals. For such a bank, the prospect of reversing unrealized losses on its HTM portfolio in due course is nothing but a mirage in the distance...
When management is forced to liquidate securities classified as HTM, the unrealized losses become realized. In addition, the status of the remaining HTM portfolio is called into question. Rather than being held to maturity, those securities suddenly must be regarded as available for sale. As soon as this happens, they must be marked to market on the balance sheet and the bank's stockholders' equity plummets ...
The simple analysis of SVB's financial position shown in this article can be repeated with any bank. The presence of unrealized losses on HTM portfolios is not unique to SVB.
The fear in the financial markets this weekend stems from the fact that investors are scrutinizing other financial institutions for similar vulnerabilities. Fractional reserve banking is a system that requires confidence. Other banks in a position similar to SVB could face bank runs next week which is why market participants fear contagion.
The failure of SVB itself is not a systemic risk to the economy, but systemic risks could arise if the bank run on SVB becomes a stampede next week. Small depositors are protected due to $250,000 of FDIC insurance. Large depositors should view themselves as creditors and must accept risk of loss. It should go without saying that those who invest in stocks and bonds of banks should be prepared to bear losses."
