A lot of talk on who is to blame for the SVB Financial collapse – this is the first big casualty of rapid rate hikes and tighter policy, but who is to blame and what are the next steps?
-SVBs management – they invested short-term deposits in longer term fixed income assets – where a large % of its 120b securities portfolio lacked any kind of interest rate hedge (payers swaps were clearly needed)
-SVBs management – the accounts showed they held 91b of its 120b securities in its HTM (assets Held to Maturity) book – these are assets they intend to hold until maturity but the accounting rules detail, that they don’t need to mark-to-market the moves in the underlying and report the ballooning losses – which again were not hedged.
-SVB deposit mix - 93%+ were above the FDIC insurance limit – this makes depositors v sensitive to any capital concerns at the bank
-SVB deposit mix - VCs had a rapid cash burn, as projects they back are typically driven by changes in interest rates (think Net Present value and Internal rates of return) – depositors took cash off SVB’s balance sheet to fund operations – SVB subsequently had to sell assets as their liabilities fell – we then see realised losses from buying securities at much higher prices.
-Short sellers/investor base – shorts had an eye on unrealised losses from the worsening asset quality for weeks – the selling accelerated when the CEO/CFO/CMO disclosed they’d sold a chunk of stock on 27 March – it was over when the SVB took a 1.8b hit on its AFS securities available for sale on Wednesday – management sold 21b of its 28b book and announced a 2.25b in equity/debt raising - investors knew with conviction that depositors were fleeing – who supports a raising when liabilities are falling – no one sensible, raising pulled
-The Fed - failing to know such a shift in rates would impact banks asset quality when its primary function is financial stability.
-Regulation - Basel 3 - banks being forced to buy govt paper against deposits - v low risk weighting (perhaps required a hedge
Hard to pinpoint this on one aspect IMO - I think there is a perfect storm going on – a lack of hedging of interest rate risk was clearly a dominant factor behind this. Top down this is a function of rapidly tightening monetary policy and the impact this had on both the asset quality and liability side of the balance sheet – we should recall SVBs model is not the same as others in the banking space, so its hard to say this is systemic – still we wait for the outcome on next steps on how deposits over 250k will be dealt with – we’re hearing they may get 50% back initially but a buyer would be the best solution
The issue for regional/smaller banks comes if is we see some sort of haircut on the deposits claim over 250k – that could see a loss of confidence in holding deposits with other smaller banks names – we shall hear more soon, but broad contagion through the financial system seems unlikely, but it is a possibility given nearly 1/3 deposits in the banking system are uninsured – any bank with a large asset base and low equity are in the spotlight
As said Friday this could be a nothing burger or have real impactions on economics - the big issue happens this week if we see no clarity on how depositors are dealt (seems unlikely) with and we get a hot CPI print
@brandoncooke agreed! The fact that the fed are saying don’t panic there’s no contagion makes me think the opposite. Not sure who deserves the blame but as the ceo sold 3.5m worth of shares a few weeks ago suggests that it wasn’t a surprise.
dimque
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@jamesfrench73 you thinking that also creates contagion because then you go and take your money out… thus creating a bank run.
Aruba808
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@dimque, It depends on The Person because we are talking about people that have UHNW. Yet they are a bunch of wokes that expect to get treated like children when they fall down and get a boo boo. Practically everyone on here manages their money vastly more responsibly. Should we get bailed out when we don't use SLs? Not having a risk compliance manger is the same thing. Bailing them out encourages future irresponsible behaviour. The fed did not cause this with rate hikes; they caused it with the cocaine operation called QE & failing to raise rates earlier. They could have had a soft landing but they bowed to their influencers and waited to raise rates which caused them to have to raise at an accelerated rate after inflation was already getting away from them.
brandoncooke
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Basel 3, Basel 4, ISO20022. Lots of banks won't be able to comply. This is the first of more to come.
SathyamurthyRamanujam
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Very we’ll analyzed. Please give me permission to share.
These people should be in jail.. but given the fallout from the GFC… I won’t hold my breath. Politicians should also share the blame as they weaken Dodd-Frank after intense lobbing by the financial industry in 2018 (guess who was President ) ??