Bank Failures and the US Banking Industry: Analyzing SVB’s $1.8B Loss and Recent Interest Rate Changes
When troubles in the tech sector pushed Silicon Valley Bank's (SVB) depositors to start making large withdrawals, the bank was forced to sell its bond portfolio in an unfavorable market. Those “unrealized losses” were realized and SVB suffered a $1.8 billion loss, leading to the bank's eventual collapse. The bank was sitting on an unrealized loss of close to $163bn – more than its equity base. The outflows of deposits then resulted in a realized loss.
SVB was not the only one. Deposits were being withdrawn from banks all over the nation. These losses set off alarms with investors and some of the bank’s customers, who began to question whether the bank would be able to come up with enough money to repay its depositors.
In comparison to the largest banks in the country, which are subject to stricter regulations such as requiring a certain amount of reserves to be held during times of crisis, midsize banks like SVB do not have the same level of regulatory oversight. However, analysts note that smaller banks like SVB don’t face quite the same regulatory scrutiny as their larger peers.
Depositors must have confidence in the banking business for it to be successful. Only when they feel certain that they can withdraw their funds whenever required, will they deposit their savings in a bank. Regulators have limited ability to address the destabilizing effects of bank failure by simply adjusting regulations.
The current banking turmoil has threatened to pull the entire US banking industry into crisis. Investors are concerned that a limited crisis could escalate and create larger issues for the stock market, although it is uncertain whether that will happen.
The US Federal Reserve raised interest rates at the end of 2019 and this had an effect on SVB's bond portfolio, as the company had also purchased tons of long-term bonds when rates were low. Given the dramatic increase in rates, the value of the Treasuries decreased significantly. When interest rates and yields increase, bond prices decrease.
According to the CME FedWatch tool, most investors are expecting the Federal Reserve to raise rates by a quarter point next week, while a notable portion are expecting the Fed to refrain from raising rates. Last week, the two-year Treasury yield reached 5%. It happened on Wednesday. Monday saw the rate fall below 4%, eventually closing out the day at slightly over 4%.
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