SVB Crash Explained: Is This the Next Lehman Moment?
In a sudden move that has sent shockwaves across the financial industry, Silicon Valley Bank (SVB), the 16th largest US bank with $212 billion in assets, has crashed 60% in a single day, wiping out billions of dollars in value for investors.
As the news broke out, some of the biggest names in finance and technology were quick to respond, with Bill Ackman calling for a US government bailout and Peter Thiel warning of a potential bank run. Meanwhile, other major banks such as JPMorgan, Bank of America, and Wells Fargo also saw their stock prices plummet by 6%.
The immediate question on everyone’s mind is whether this is a Lehman moment or an overblown event that will soon pass. The answer, as with most financial crises, lies somewhere in between. While it is true that SVB’s crash is not on the same scale as Lehman Brothers’ collapse, it is still a significant event that has exposed some fundamental weaknesses in the bank’s business model.
To understand what went wrong, we need to start with how banks make money. Like any other bank, SVB’s main source of revenue is the spread between the interest earned on loans and the interest paid on deposits, known as net interest income (NII). This accounts for about 73% of the bank’s total profits. SVB generates NII from two sources: loans to startups and fixed income investments such as treasuries and mortgage-backed securities (MBS).
🏦📉 SVB Crash Explained📉🏦
Silicon Valley Bank—#16 largest US bank with $212B — just crashed 60% in 1 day & fell 22% post-close. Stock halted now.@BillAckman is calling a US gov bailout.@peterthiel is calling a bank run.
JPM, BAC, WFC all dropped 6%.
Is this… https://t.co/xT4t5hLiwI pic.twitter.com/GEbvAdT8SQ
— Ming Zhao (@FabiusMercurius) March 10, 2023
The problem for SVB is that both these sources of income are vulnerable to market fluctuations. If startups default on their debt or interest rates rise, SVB’s profitability takes a hit. In fact, it was the latter that triggered SVB’s recent crash.
As the Federal Reserve raised interest rates, the value of SVB’s MBS plummeted, leading to a $1.8 billion write-down on almost the entire available-for-sale (AFS) fixed income portfolio. This loss is equivalent to SVB’s net income for an entire fiscal year and has prompted the bank to raise $1.75 billion in common and preferred stock to cover the shortfall.
The question on everyone’s mind is whether this loss is the end of SVB’s troubles or just the beginning. As it turns out, there are some reasons to believe that the worst may be yet to come. SVB still has $74 billion worth of AFS and held-to-maturity (HTM) securities on its books that are vulnerable to further losses. While the bank has only realized losses on $21 billion so far, sudden declines in the value of these securities could force SVB to recognize a massive one-time impairment charge that could further dent its earnings and regulatory capital.
So, what does this mean for SVB’s depositors and equity investors? Deposit insurance provided by the Federal Deposit Insurance Corporation (FDIC) means that depositors are protected up to $250,000 per account. However, equity investors have no such protection and are likely to suffer significant losses as SVB’s stock price continues to slide.
The good news is that SVB’s Tier-1 capital ratio, which measures a bank’s ability to absorb losses, stands at a healthy 15%, well above the target of 10%. Additionally, the bank’s loan-to-value (LTV) ratio is around 40%, significantly lower than the target of 70%. These metrics suggest that SVB is still in a relatively strong position, but the recent events have highlighted the importance of constant vigilance and risk management in the financial industry.
In conclusion, the crash of Silicon Valley Bank (SVB) has sent shockwaves through the financial world. The bank’s $1.8 billion writedown on a $21 billion sale of its AFS fixed-income portfolio has raised concerns about its financial stability and the health of the broader banking sector.
While SVB is raising $1.75 billion in common and preferred stock to cover the losses, there are fears that this may not be enough, given the potential for further writedowns on its $74 billion HTM securities.
The fallout from the SVB crash has divided opinion among experts, with some likening it to the Lehman Brothers collapse that triggered the global financial crisis of 2008, while others see it as a relatively contained event that has been overblown by market panic.
Nonetheless, the crash highlights the importance of metrics and ratios such as Tier-1 capital and loan-to-value ratios in assessing a bank’s financial health, and the need for robust risk management practices to mitigate potential losses.
For depositors, the FDIC insurance provides some protection in the event of bank failures, up to a limit of $250,000 per depositor per insured bank. However, equity investors may face significant losses if the bank is unable to recover from its writedowns and other financial woes. Therefore, it is crucial for investors to thoroughly research and understand the financial health of their bank before investing in its stock.
Overall, the SVB crash serves as a reminder of the risks inherent in the banking industry and the importance of careful risk management practices to safeguard against potential losses. While the full extent of the fallout from the crash remains to be seen, it is clear that it will have far-reaching implications for both SVB and the wider financial sector in the months and years to come.
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