Is The Silicon Valley Bank’s Failure Another “Canary in The Coal Mine”?
The comments below are an edited and abridged synopsis of an article by Doug French
When Fed Chair Jay Powell recently testified before the senate and the House, he said that banks were well capitalized. The following day shares of SVB Financial Group, parent of Silicon Valley Bank, fell 60% (and another 30% in afterhours trading) after the bank sold large portions of its securities portfolio and wanted to raise fresh capital, highlighting a problem for lenders who have seen rising interest rates hammer the values of their bond holdings.
SVB depositors ran for the exits along with shareholders, and the FDIC promptly closed the bank.
While SVB was a lender to the venture capital industry and tech sector, its investments in were bonds backed by the US government. However, the value of those bonds has plunged as interest rates have increased dramatically.
This concerns bonds designated “available for sale” as opposed to “held to maturity.” The available-for-sale label allows banks to exclude the paper losses on those holdings from earnings and regulatory capital, although the losses do count in equity. Held-to-maturity allows banks to exclude paper losses on those holdings from both earnings and equity.
This problem does not only apply to banks serving the tech industry. The FDIC reported that US banks’ unrealized losses on available-for-sale and held-to-maturity securities totaled $690 billion as of September 30, up 47% from a quarter earlier.
SVB said it decided to sell holdings and raise fresh capital “because we expect continued higher interest rates, pressured public and private markets, and elevated cash burn levels from our clients as they invest in their businesses.”
SVB had $91.3 billion in held-to-maturity securities on its year-end balance sheet. It reported the value of those securities was $15.1 billion below their balance-sheet value. “The fair-value gap at year-end was almost as large as SVB’s $16.3 billion of total equity.” Gulp.