3/9/2023: Silicon Valley Bank is Having a Bank Run
$SIVB tanked 60% today
Silicon Valley Bank is having a bank run after announcing that they are raising $1.25B of equity to shore up their balance sheet, after selling $21B of securities at a $1.8B loss this quarter. After the news is out, people start to pull deposits out of the bank. FDIC only guarantees up to $250K of deposits. AFAIK, most VC funds keep more than that in their bank accounts, including my angel fund. I am pulling the money out. It’s still processing. I hope there won’t be any issues.
If we dig deeper, we will realize that SVB has a very similar problem to Silvergate bank. As shown in the above tweets, after dramatically growing their deposits in 2021, they invested the deposits into 10+ year mortgage backed securities, earning a whopping ~1.6% yield. Now, the short term interest rate is 5+% and customers are pulling deposits out of the bank. It’s a very very tough situation. They could probably borrow at 5% from FHLB to meet withdrawal requests but they have to absorb that 3.X% gap. With $91B(?) of these securities on their balance sheet, we are talking about ~$3B a year in interest expenses or ~$30B over the next 10 years. SVB only had $16.3B of equity at the end of 2022. After the announced $1.8B loss and this annual interest expense, I don’t know if they can really make it. The rate could also potentially go up to like 6% and their situation will get even worse. I don’t know why on earth SVB decided that purchasing long-term debt without hedging at such a low yield is a good idea.
I do think Silvergate Bank and Silicon Valley Bank are probably not the only banks that are in this situation. I suspect there are probably quite a few banks that made similar asset purchase decisions when rates were zero and with the rapid rise of interest rates, they are currently in deep deep trouble.
Many many banks have the same problem.
The issue is that they dont have to mark to market the losses until they are realized.
Banks are typically 8:1-10:1 leveraged on deposits.
Banks mostly own treasuries and MBS. So yeah. Lots of insolvent banks out there. As soon as a run starts this will keep happening.
The fed just wants this to be not systemic. As long as it's not systemic then it's forced deleverging which helps bring down inflation and pull down rates and fix the other banks.
So yeah. The game with the banks right now is don't be the weakest one in the heard.
Many banks have been quietly shoring up balance sheets already. See Hsbc, see BMO.
Note forced deleverging isn't good for risk assets (equities).
Did your withdrawal end up succeeding? This failure moved faster than I imagined it would.