By Friday, the Silicon Valley bank had largely become a household name, even by people who had never heard of, or cared about, it before.
Silicon Valley Bank was a California bank subsidiary of SVB Financial Group (SIVB). shut down, The move came from the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation (FDIC) as the bank’s receiver.
This was the story that grabbed headlines at the end of the trading week and was the main reason for the selloff in the markets on Thursday and Friday, as well as a significant jump in volatility. Silicon Valley Bank became one of the nation’s top 20 largest banks in terms of deposits — with only $175 billion in value, of which more than $150 billion was uninsured) went into receivership in the blink of an eye. SIVB ended fiscal 2022 with just $200 per share in book value and started last year with a market capitalization of nearly $40 billion. As of December 31, the bank had approximately $209 billion in total assets and over $175 billion in total deposits.
It marks the biggest bank failure in the country since the Great Depression.
The bank became the latest victim of the most aggressive monetary policy in 40 years. After failing to act in 2021, the Federal Reserve which believed that inflation was “fleeting”, began its current journey of rate hikes in March last year. The fed funds rate now sits at 4.50% to 4.75%, with an additional quarter-percentage point to half-percentage point increase when the Federal Open Market Committee meets on March 21 and 22. Whether the explosion of the Silicon Valley bank affected the Fed’s calculations at this point remains unknown.
The Silicon Valley bank implosion certainly had a big impact on the entire market, with banks getting hit hard as well as higher beta parts of the market like biotech and small caps. Both the Russell 2000 and the SPDR S&P Biotech Exchange-Traded Fund (XBI) are close to testing their lows since last June. Silicon Valley’s primary problem was that it had about $60 billion of hold-to-maturity (HTM) mortgage-backed securities on its books as well as some $10 billion in collateralized mortgage obligations, or CMOs, which made up a substantial amount of its total assets. used to represent
When interest rates started rising, the bank started taking significant unrealized losses on this portfolio. When management concluded this week that interest rates would remain high longer than previously thought, the company sold just over $20 billion of securities available for sale that were to be reinvested in shorter-term Treasuries . This resulted in a loss of approximately $2 billion, which management was attempting to fill by raising large capital to increase liquidity. When that and other efforts failed, the FDIC felt it had no choice but to shut down the bank on Friday, further spooking the markets.
Unrealized losses on the Silicon Valley bank’s HTM bond portfolio dwarfed its total equity. Other banks have not been as imprudent as SVB. However, at the end of 2022, banks had similar unrealized losses on these types of bonds of about $250 billion. According to a piece this week, Bank of America (BAC) represented more than 40% of this exposure. zero hedge, Now, I do not believe this is the start of the next financial crisis (and I am praying it is not).
However, I think contagion fears could linger for a while, leading to further selling in banks. And if that theme holds, I can easily see Bank of America moving significantly below the $30 level it’s currently trading at. So, at the end of Friday I bought a small amount of July $30 puts on the stock for $2. At the close of the market on Friday, they traded at around $2.20. The contagion spread wide enough that I could see the shares going down to the $20 low and making a nice profit on my trade. If the contagion fears prove unfounded, the rest of the market should enjoy a nice rally and I’ll be happy to live with the loss of my small “insurance policy”.