Is SVB Issue a Systematic Problem Or an Overreaction？

On March 8, SVB Financial Group SIVB sold $21 billion in securities for a loss of $1.8 billion due to a larger-than-expected decline in deposits. SVB is the holding company for Silicon Valley Bank of Santa Clara, Calif, which caters to technology and life-science companies, especially startups.

After the Fed began raising rates, it battered the tech startups and venture-capital firms Silicon Valley Bank serves, sparking a faster-than-expected decline in deposits that continues to gain steam.

A few banks have run into trouble this week, sparking fears that other banks could be forced to take losses to raise cash. The KBW Nasdaq Bank Index notched its biggest decline since the pandemic roiled the markets nearly three years ago.

Treasury and mortgage bonds plunged in price as the Federal Reserve hiked. Now if a bank is able to hold on to these securities until they mature, it doesn’t ultimately lose anything. The problem comes if a bank needs to sell them before maturity to cover deposit withdrawals; that is when accounting rules require them to show the realized losses in their earnings.

At SVB, unrealized losses had been piling up throughout last year and were visible to anyone reading its financial reports. “Unrealized losses weaken a bank’s future ability to meet unexpected liquidity needs.” FDIC Chairman Martin Gruenberg said in a March 6 speech.

The risks are most acute for small lenders. Smaller banks must often pay higher deposit rates to attract customers than megabanks with flashy technology and extensive branch networks. Bank of America paid an average rate of 0.96% on deposits in the fourth quarter, compared with 1.17% for the industry. SVB paid 2.33%.

Twitter user MacroAlf suggests the issue seems more systemic, with one of the scary charts showing the large extent of unrealized losses in bonds sitting in books classified as ''Held To Maturity'' at US banks at the end of 2022.

In other words, small banks face a double whammy: firstly, Less ''financial liquidity'' (reserves) in the system, disproportionately affecting them; Secondly, a tougher funding landscape, with plenty of safer and higher-yielding alternatives for depositors.

The fear is that other banks will face the same troubles, which explains Thursday’s selling in the industry. Wells Fargo analyst Mike Mayon says that the issue isn't one of the deposits but the diversity of deposits. SVB's customers were primarily venture-capital firms, and venture capital has been under pressure recently, forcing companies to draw down their deposits as they burn through cash. That's likely not the case for bigger banks with more diversified sources of funding. "To us, the larger the bank, the more diversified the funding." Mayo writes.