To help achieve that outcome, a joint statement by the US Treasury, the Federal Reserve and the FDIC over the weekend announced that SVB "depositors will have access to all of their money starting Monday, March 13". So there needs to be some assurance that system breakdown risk is low.īut crucially, we have assurance that system breakdown risk is low In the end, the banking system is a game of trust. But even if that's the case, there is still a fear that contagion risks are uncomfortably elevated. So far, it seems that the potential problem banks are few, and importantly do not extend to the so-called systemically important banks. Treasury Secretary Janet Yellen in fact alluded to the possibility that there may indeed be some, as she noted on Friday that the Treasury was monitoring some other banks. The Federal Reserve and Treasury are ahead of the game just in caseīut that does not mean that there aren't other SVBs out there. Banks that hold either a lower proportion of bonds to loans (most do) and/or hold more of their securities in floating rates would be far less susceptible to an SVB-type repeat. Under pressure, liquidation of the bond portfolio crystallised losses, necessitating the subsequent need to raise capital. This would damage the running yield on such a portfolio, pressuring the implied interest rate margin down. As rates rise, the value of this portfolio fell. Moreover, SVB's bond portfolio had a large longer-dated fixed-income component. This meant it was more susceptible than most banks to the performance of its bond portfolio. Unusually, SVB employed far more of its deposit base in long-dated bonds than in writing loans. Banks have the option to invest in bonds as an alternative to writing loans, and this is most applicable where, for whatever reason, there is either not enough demand for loans, or the terms on writing loans are less appealing. In the traditional banking model, deposits raised are used to underwrite loans. All banks hold securities, for various reasons. There has already been a degree of market contagion, on fears of replication in other banks. There has already been a degree of market contagion, on fears of replication in other banks An attempted auction process began over the weekend, seeking suitors. The regulators stepped in, with the FDIC acting as the receiver in a clean-up exercise. Inevitably, with trust gone, Friday saw SVB go down. Thursday then saw material deposit outflows, and the SVB stock collapsed. It started on Wednesday as SVB took a US$1.8bn loss on a forced USD$21bn bond liquidation from its available-for-sale portfolio it then announced an intention to raise US$2.25bn in capital to help plug the gap. The demise of Silicon Valley Bank was fast, super fast. Eerie echoes of the global financial crises, but also material differences
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