The fallout from the collapse of Silicon Valley Bank
Investors globally are assessing the ripple effect of the collapse of the second largest US bank failure in history.
US stocks tumbled on Friday as investors ran for safe havens, unnerved by concerns about the health of the US financial system after regulators shut down Silicon Valley Bank, marking the largest bank failure in the US since 2008.
Silicon Valley Bank, a major lender to early-stage startup technology and healthcare companies, collapsed after a run on deposits doomed the lender's plans to raise fresh capital.
Liquidity Crunch Leads to SVB Collapse
SVB’s stock plunged more than 60% to $106.04, a new 52-week low, on March 9, 2023.
Trading in SVB stock was halted before the market opened on Friday, March 10 and the Federal Deposit Insurance Corporation took over the bank’s assets.
“Aside from crypto-related meltdowns, this is one of the first banks we’ve seen that has really suffered a liquidity crunch, which has forced it to restructure the balance sheet and realize losses on its securities portfolios,” said Eric Compton, equity strategist at Morningstar.
He added: “SVB scores materially worse than any bank we cover on liquidity and unrealized-loss metrics. This makes us think that SVB could be facing a unique liquidity crunch that does not have to feed through the entire system; however, it does highlight that these risks are now more elevated. It also highlights that it can be very difficult to predict how funding pressure can change in any given quarter and when these risks can materialize.”
What Happened at SVB?
Compton explains: “Banks bought mortgage-backed securities and Treasuries before interest rates started to rise. As interest rates have risen, the prices of these securities went down. Banks are holding a number of securities which technically have losses on them but as yet are unrealized.
“The securities pose limited credit risk because Treasuries and government-backed MBS carry the explicit or implicit backing of the government. However, if a bank is forced to sell them at a loss, those losses will then flow through the balance sheet and start to erode equity. This presents a liquidity problem, especially if deposits start to leave the banks, which they are. Deposit outflows put more and more pressure on the banks to sell off existing assets. This risk has been lurking beneath the surface but just materialized in a big way for SVB. This is why bank stocks are selling off in response to this news.”
In November 2022, Martin Gruenberg, the chairman of the Federal Deposit Insurance Corporation, flagged mounting unrealized losses in bank securities portfolios as an “overhang” that could soon become “problematic.”
Still, Compton says he doesn’t expect other banks in his coverage area will need to take similar measures to SVB. He explains that while Truist Financial TFC, U.S. Bancorp, and Bank of America BAC have the largest unrealized losses as a percentage of tangible equity, “their liquidity profiles seem much less stressed than SVB.”
SVB’s actions highlight increasing funding pressures in the banking industry that will put pressure on net interest income, Compton says.
“Liquidity issues are an evolving risk worth watching,” he adds.
