2023 Q1 In Review - Integrity Wealth Advisors, Ventura & Ojai, California
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SILICON VALLEY BANK COLLAPSE – WHAT HAPPENED?<br />
BANKING ON LIQUIDITY<br />
<strong>In</strong> the wake of the stunning Silicon Valley Bank (SVB) crisis in which the bank was ultimately shut down by regulators, there is growing concern that similar issues<br />
could spread to other US banks in the coming months. Let’s examine what happened to SVB and the potential for contagion across the banking industry.<br />
THE BACKSTORY<br />
Banks are big investors in assets like Treasury bills<br />
because they need safe places to park deposits. Over<br />
the past several years, financial institutions have<br />
piled into T-bills during a period of historically low<br />
interest rates.<br />
The problem this created for banks is simple: when<br />
rates moved higher as the Federal Reserve sought<br />
to combat inflation, it lowered the value of existing<br />
bonds on banks’ balance sheets. The FDIC in<br />
February reported that US banks’ unrealized losses<br />
on available-for-sale and held-to-maturity securities<br />
totaled $620 billion as of Dec. 31, up from $8 billion<br />
a year earlier before the Fed's rate push began (see<br />
chart to the right).<br />
This is an issue for all banks to varying degrees. For<br />
SVB the problem was particularly acute. Banks don't<br />
have to realize losses on bonds that may have gone<br />
down in value amid rising rates if client deposits<br />
remain sufficient to cover liquidity requirements.<br />
But SVB, being a venture capital and tech-focused<br />
bank, has clients with a high rate of cash burn.<br />
The bank needed ongoing deposits to cover the<br />
liquidity demands from their clients, particularly with<br />
decreasing bond values. When ongoing deposits<br />
dried up SVB was forced into selling these securities<br />
at significant losses.<br />
The good news is that the biggest US banks are much stronger than they were in the lead up to the last big banking crisis of 2008, in part because regulators forced<br />
them to hold more capital and survive numerous stress test scenarios over the last decade and a half. Also, the giants have more diverse funding and customer<br />
bases than banks such as SVB, which gives them many more options during challenging times.
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