December 5, 2023

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Fed Rate Hikes and Flawed Portfolio Tanks Silicon Valley Bank

The fallout from the collapse of Silicon Valley Bank was evident on Monday, dragging down banking stocks internationally.

In Europe, banking stocks were down 5.5% after previously closing 4% lower on Friday. Also on Friday, the SVB panic pulled down major U.S. indexes and all were all down at least 1%. On Sunday, regulators shut down Signature Bank – a major lender to the cryptocurrency industry. 

Seeking to calm the markets, federal regulators have assured depositors that they will be made whole, but many analysts say SVB’s practices are far from unique in the industry and are predicting further carnage.

EUROPEAN MARKETS

TICKER COMPANY PRICE CHANGE %CHANGE 
.FTSEFTSE 1007575.41-172.94-2.23
.GDAXIDAX14961.88-466.09-3.02
.FCHICAC 40 Index7020.09-200.58-2.78
.FTMIBFTSE MIB26228.22-1053.74-3.86
.IBEXIBEX 35 Idx9003.3-281.7-3.03

More to Come?

“We had the Federal Board of Reserve change from fractional reserves to no reserves, and that let banks like SVB go out and start buying assets instead of simply loaning money,” said Keith Fitz-Gerald, a principal trader at the Fitz-Gerald Group, appearing on CNBC’s Capital Connection on Monday.

“My contention is that banking should be boring, a lot like watching paint dry — and any time it’s not, you’ve got a problem. Which is unfortunately what happened,”, adding, “With regard to who’s to blame here, I think that the greed and avarice that has long been present in Silicon Valley has come home to roost.”

At the start of the week, SVB was the 16th largest bank in the U.S., specializing largely in funding tech startups and venture capital firms. The 40-year old firm was Silicon Valley’s largest bank measured by deposits. Recently SVB had been hammered by the Federal Reserve’s aggressive interest rate hikes, leaving it with a portfolio of losing U.S. Treasury and government backed mortgage securities. 

Last Wednesday, SVB announced it had sold $21 billion of those securities at a loss of about $1.8 billion, and that it needed to raise $2.25 billion to cover client withdrawals and fund new lending. The news caused SVB’s stock price to nosedive and triggered a run on the bank by panicked depositors. 

Regulators Asleep at the Switch?

Some market analysts say SVB’s collapse was due to holding assets exposed heavily to long-term interest rates, which the Fed has raised to a 15-year high. “SVB was in a league of its own: a high level of loans plus securities as a percentage of deposits, and very low reliance on stickier retail deposits as a share of total deposits,” wrote Michael Cembalest, J.P. Morgan’s chairman of market and investment strategy, in a weekend note to clients.

With regard to federal and state regulators, Cembalest wrote, “I would submit not only are they complicit, they had a hand in designing this mess…. SVB did what they needed to do, arguably, within the structure of rules that are the problem. So, to me, it’s the system that’s broken, or at least needs to be seriously reviewed here.”

“I am personally flabbergasted that the system is what it is today and that this stuff was allowed to happen,” said Fitz-Gerald on CNB. He then asked “Where were the regulators? Where were the auditors? I think there’s going to be very serious questions asked about how the rating systems work. Why were these banks allowed to take on assets when they should have been backing their deposits?”

“That is a fundamental issue that has got to come to the forefront now. We can’t ignore it and kick the can down the road. I think it’s an embarrassment to the US Federal Reserve. I think it’s an embarrassment to the banking regulators, frankly.”

By J.R. Grissom

By J.R. Grissom

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