The situation with SVB is a direct result of the Federal Reserve’s reckless policy of hiking rates at a historically unprecedented speed. As the inter-bank rate increased, Treasuries, municipal bonds, and mortgage-backed securities that SVB held on its balance sheet, totaling over $117 billion USD (with total assets of $205.2 billion), and which served as the main source of revenue for the bank, started to depreciate. This led to an unrealized decrease in asset value, estimated at about $10 billion, or less than 5 percent of all the bank’s assets.
However, when the first of about 30K of SVB’s customers began to close their deposits (165K in total) due to rumors about the bank’s insolvency, the management decided to strengthen the bank’s liquidity position by selling over $20 billion worth of Treasuries for $1.8 billion less than their initial on-balance price. This led to the mark-to-market event for SVB (wherein all securities on hold must be re-valued according to current prices), and the transaction was publicly reported to the SEC, resulting in a panic that caused more than $42 billion USD to leave SVB in just one day.
In addition to Powell’s unthoughtful QT emergency program, three other factors contributed to SVB’s demise. First, the bank had an over-concentration of large unsecured deposits belonging to a group of inter-connected clients, such as startups funded by the same VCs, with some of these deposits exceeding hundreds of millions of dollars. Second, a lackluster financial management practice resulted in underpriced securities sitting on the balance sheet for more than a year since the start of QT. Third, the bank’s up-to-date transaction system allowed multiple clients to instantaneously withdraw an unlimited amount of funds from their deposits.
Overall, this situation does not threaten to undermine the stability of the US monetary system, as the total assets size of the system exceeds $22 trillion USD, including those of JPMorgan Chase ($3.8T), Bank of America ($2.9T), Wells Fargo ($1.8T), Citigroup ($1.8T), and US Bancorp ($553B). SVB’s assets are relatively small in comparison, and its client base is insignificant, as Bank of America alone has more than 65 million clients.
The spillover effects are mostly psychological. Many other small, regional banks are now under intense scrutiny by both authorities and investors, leading to the selling of their stocks. As a result, some clients may decide to move their deposits from these banks to larger financial institutions.
The Fed has also suffered a major blow to its reputation, as many big-bank managers are calling for a rate hike pause. Another negative effect is political, with hawks from both sides of the aisle calling for more stringent banking regulation and additional stress-tests.