Highlight of the Week
SVB and SBNY Transferred to FDIC Receivership
This past week saw the 2nd and 3rd largest bank collapses in US history, with a bank run on Silicon Valley Bank (SVB) and the weekend closure of Signature Bank (SBNY). At SVB, prominent venture capitalists advised portfolio companies to pull deposits from the bank after losses on securities sales were announced earlier in the week. The bank had a large portion of its balance sheet invested in long-term held-to-maturity (HTM) bonds, carried on balance sheet at amortized cost. The end-of year unrealized loss on these bonds was $15.16 billion, a result of the rapid rise in interest rates over the past year. Tangible Common Equity (TCE) at SVB was less than the unrealized loss, making the bank effectively insolvent. As these losses were about to be realized, the FDIC had to step in to assure all depositors coverage (both insured and uninsured) in order to prevent runs on other banks. This week many depositors have been questioning the risk of holding deposits at other regional banks. This rapid report highlights unrealized losses on HTM bonds as a reflection on a bank’s equity. This problem is not unique to a specific size of bank – i.e. it is systemic – and it is an immediate focus for all bank risk management.
Rate Curves
Rapid Report:
SVB
- As disclosed in 2022 10K, SVB’s unrealized losses tied to the value of its HTM investment portfolio was 128% of TCE.
- With the dramatic rise in interest rates in 2022 the embedded losses in SVBs securities portfolio had eclipsed the value of the bank.
Big 4 Banks
The 4 largest US banks, combining for total assets of over $11T, have similar valuation issues in HTM investments – though none eclipse equity value.
Regional Banks
Regional banks follow a similar trend but have also been hammered by equity markets this week. Investors are concerned about what else may be affecting the balance sheets of smaller firms.
