When the safest assets aren’t any more:
The fall of Silicon Valley Bank came as a surprise, but the reasons why are not all that surprising. It’s the story of a bank mismanaging its assets and creating panic. Oh, and the Fed also shares some responsibility.
In the past couple of years business was booming for SVB, whose almost exclusive clientele of startups and its employees was depositing huge amounts of capital in the bank. SVB then used the cash last year to buy US long dated treasuries, one of the safest assets on the planet. The problem is that at the same time the US Federal Reserve aggressively hiked interest rates, sending rates higher and inversely making prices of bonds fall. This resulted in a big balance sheet loss for the bank.
SVB then decided to sell their treasury portfolio to reduce further accounting losses as they anticipated rates to go higher and also to chase higher yields by buying newer treasuries. As the announcement was made public, it triggered withdrawals which proved fatal to the bank. As the drama unfolded the regulators ensured all deposits would be safe but shareholders were wiped out.
So far, the crisis has been contained even though it led to some bad days for financial stocks, especially US regional banks. It is clear banks are sitting on accounting losses from holding these long maturing treasuries, but they probably didn’t put all their eggs in one basket and are managing their assets better. Many said the Fed would hike rates until something broke, most likely the economy, but it looks like it might be affecting the financial sector first. Until SVB, bond markets were expecting 10-year treasuries north of 5%, since then they are expecting up to two rate cuts by the end of the year. This will be welcome news for holders of large amounts of treasuries and their balance sheets.