If you don’t know about this, it’s a noteworthy event… The second-largest commercial bank failure in US history…
With that in mind, thought I’d pen a quick email on how this happened, and the concern of fallout (affecting other banks).
Summary:
- Deposits started drying up for SVB, a bank that was heavily weighted in start-up/tech companies (many of which, are struggling disproportionately with the current cost/rate environment). They also carried a disproportionate amount of uninsured deposits (deposit accounts for individuals/companies that exceeded $250K). In fact, this was more than 2-3x as many when compared to larger banks, such as Chase or BofA. If you’d like to take a deeper dive into the importance of deposits with banks, see the screenshot below (thought this was a helpful visual aid, courtesy of MBS Highway). A bank without deposits is a fish that can’t swim.
- The money they had invested in 2020 / 2021 into low-yield treasuries was just sold for a $2B loss (also due to drastic rate increases).
- The bank then announced a capital raise (to bolster cash), which perpetuated the speed of deposit withdrawal – specifically as they were trading below their tangible book value (a huge red flag).
From a consumer side, it appears that FDIC insurance will cover up to $250K for depositors (to make whole the folks that have checking / savings with them), but bank investors/shareholders will more than likely take significant losses (read: it’s not a “bailout”, like in 2008, where even bank investors were made whole).
Note: the bond market (which mortgage rates typically follow) REALLY likes this news, and we’re seeing the 10 yr yield go down to 3.5% (was just at 3.92 last week…!). If you’ve been following our weekly updates: yield is down, and rates are down. With this news, rates have been drastically improving… If you need scenario-specific info on this, please reach out…
The big concern with the SVB failure is the risk of contagion (ie, happening to other banks).
At this point, “market experts” believe it is relatively isolated; due to the disproportionate footprint that SVB had in start-up/tech industries (too heavily weighted in one, very volatile sector).
Only time will tell at this point.
