The abrupt collapse of SVB Financial is unnerving. Silicon Valley Bank is the biggest bank to fail since the 2008 financial crisis. But the conditions that gave rise to the liquidity crunch at the tech-focused lender are not widely shared by most banks. The 15 per cent drop in the KBW bank index this week suggests panic about a wider national banking crisis. The fear is unwarranted.
US banks are under pressure to stump up for deposits amid the sharp jump in interest rates. That has raised questions over the industry’s vast bond holdings. Higher rates means banks are sitting on $620bn of unrealised losses on these securities. However, this only becomes an issue if a bank needs to sell them before maturity to raise cash, crystallising the losses in their market value.
SVB’s problem is unique. Its deposit base is highly concentrated in one industry. Its deposit base swelled during the era of low interest rates — growing from $49.3bn at the start of 2019 to $189bn at the end of 2021. But those customers have been pulling cash out to keep their businesses going as venture capital funding dried up. FDIC insurance, which is meant to prevent bank runs, has little application here. Nearly 90 per cent of SVB’s deposit base is uninsured, according to data from S&P Global Market Intelligence. The industry average is about 52 per cent.
Banks with VC exposure like PacWest Bancorp and First Republic will come under scrutiny. But big lenders such as JPMorgan and Bank of America can afford to shed some of the deposits they amassed during the coronavirus pandemic. Most small and midsized banks can pull a number of levers to boost liquidity. These include offering higher-yielding certificates of deposits to attract cash, cutting back on loan growth and borrowing from the Federal Home Loan Banks.
Higher funding costs will be a headwind for the banking industry this year. But the pressure will be on net interest margin and profits, not balance sheet liquidity.
Letters in response to this article:
By letting SVB fail you avoid future moral hazard / From Jeremiah D Braunlin, Ridgewood, NJ, US
Why the weekend proved the perfect circuit breaker / From Rob Walker, London NW5, UK