A New Disturbance in the Force

Depending on the region, I think the regionals are fine as well.

If you aggressively lend in the Tech industry and have all your eggs in that basket…bad things man.

Banking has been around since the caravans crossed the desert. The only thing that has changed is the delivery mechanism. The principals are still the same. Keep your overhead low so you can make money on less risky loans, be conservative, keep your financial commitments short term, and diversify.

SVB violated all those principles because they were cool and tech savvy.

1 Like

I think that if wasn’t a contagion, the Fed wouldn’t be proposing to drop rates by 75 bps. This is a move to save banks, but it also pushes inflation up.

A newswire report by morningstar was posted on Friday (subsquently removed), mentioning the following banks showing similar risks as SVB (20 banks that are sitting on huge potential securities losses—as was SVB | Morningstar)

First, a quick look at SVB

Some media reports have referred to SVB of Santa Clara, Calif., as a small bank, but it had $212 billion in total assets as of Dec. 31, making it the 17th largest bank in the Russell 3000 Index as of Dec. 31. That makes it the largest U.S. bank failure since Washington Mutual in 2008.

One unique aspect of SVB was its decades-long focus on the venture capital industry. The bank’s loan growth had been slowing as interest rates rose. Meanwhile, when announcing its $21 billion dollars in securities sales on Thursday, SVB said it had taken the action not only to lower its interest-rate risk, but because “client cash burn has remained elevated and increased further in February, resulting in lower deposits than forecasted.”

SVB estimated it would book a $1.8 billion loss on the securities sale and said it would raise $2.25 billion in capital through two offerings of new shares and a convertible bond offering. That offering wasn’t completed.

So this appears to be an example of what can go wrong with a bank focused on a particular industry. The combination of a balance sheet heavy with securities and relatively light on loans, in a rising-rate environment in which bond prices have declined and in which depositors specific to that industry are themselves suffering from a decline in cash, led to a liquidity problem.

Banks leverage their capital by gathering deposits or borrowing money either to lend the money out or purchase securities. They earn the spread between their average yield on loans and investments and their average cost for funds. The securities investments are held in two buckets:

In its regulatory Consolidated Financial Statements for Holding Companies–FR Y-9C, filed with the Federal Reserve, SVB Financial, reported a negative $1.911 billion in accumulated other comprehensive income as of Dec. 31. That is line 26.b on Schedule HC of the report, for those keeping score at home. You can look up regulatory reports for any U.S. bank holding company, savings and loan holding company or subsidiary institution at the Federal Financial Institution Examination Council’s National Information Center. Be sure to get the name of the company or institution right – or you may be looking at the wrong entity.

Here’s how accumulated other comprehensive income (AOCI) is defined in the report: “Includes, but is not limited to, net unrealized holding gains (losses) on available-for-sale securities, accumulated net gains (losses) on cash flow hedges, cumulative foreign currency translation adjustments, and accumulated defined benefit pension and other postretirement plan adjustments.”

In other words, it was mostly unrealized losses on SVB’s available-for-sale securities. The bank booked an estimated $1.8 billion loss when selling “substantially all” of these securities on March 8.

The list of 10 banks with unfavorable interest margin trends (running similar trends to SVB)

Bank Ticker City AOCI ($mil) Total equity capital ($mil) AOCI/ TEC-- AOCI Total assets ($mil)
Customers Bancorp Inc. CUBI West Reading, Pa. ($163) $1,403 -10.40% $20,896
First Republic Bank FRC San Francisco ($331) $17,446 -1.90% $213,358
Sandy Spring Bancorp Inc. SASR Olney, Md. ($132) $1,484 -8.20% $13,833
New York Community Bancorp Inc. NYCB Hicksville, N.Y. ($620) $8,824 -6.60% $90,616
First Foundation Inc. FFWM Dallas ($12) $1,134 -1.00% $13,014
Ally Financial Inc. ALLY Detroit ($4,059) $12,859 -24.00% $191,826
Dime Community Bancshares Inc. DCOM Hauppauge, N.Y. ($94) $1,170 -7.50% $13,228
Pacific Premier Bancorp Inc. PPBI Irvine, Calif. ($265) $2,798 -8.70% $21,729
Prosperity Bancshare Inc. PB Houston ($3) $6,699 -0.10% $37,751
Columbia Financial, Inc. CLBK Fair Lawn, N.J. ($179) $1,054 -14.50% $10,408
SVB Financial Group SIVB Santa Clara, Calif. ($1,911) $16,295 -10.50% $211,793

Banks with the highest percentage of negative AOCI to capital

Bank Ticker City AOCI ($mil) Total equity capital ($mil) AOCI/ (TEC – AOCI) Total assets ($mil)
Comerica Inc. CMA Dallas ($3,742) $5,181 -41.90% $85,406
Zions Bancorporation N.A. ZION Salt Lake City ($3,112) $4,893 -38.90% $89,545
Popular Inc. BPOP San Juan, Puerto Rico ($2,525) $4,093 -38.20% $67,638
KeyCorp KEY Cleveland ($6,295) $13,454 -31.90% $189,813
Community Bank System Inc. CBU DeWitt, N.Y. ($686) $1,555 -30.60% $15,911
Commerce Bancshares Inc. CBSH Kansas City, Mo. ($1,087) $2,482 -30.50% $31,876
Cullen/Frost Bankers Inc. CFR San Antonio ($1,348) $3,137 -30.10% $52,892
First Financial Bankshares Inc. FFIN Abilene, Texas ($535) $1,266 -29.70% $12,974
Eastern Bankshares Inc. EBC Boston ($923) $2,472 -27.20% $22,686
Heartland Financial USA Inc. HTLF Denver ($620) $1,735 -26.30% $20,244
First Bancorp FBNC Southern Pines, N.C. ($342) $1,032 -24.90% $10,644
Silvergate Capital Corp. Class A SI La Jolla, Calif. ($199) $603 -24.80% $11,356
Bank of Hawaii Corp BOH Honolulu ($435) $1,317 -24.80% $23,607
Synovus Financial Corp. SNV Columbus, Ga. ($1,442) $4,476 -24.40% $59,911

If banks holding degraded investments have to sell in order to raise capital, it could become endemic to the smaller banks which are all over the country.

Bank failures since 2000- (Georgia is different: Until 1996, a bank couldn’t open branches across county lines and there are 159 counties in the state, so there were a lot of banks. And three of the top 10 fastest growing counties were around Atlanta back then, so when the financial crisis hit, it really hit the state hard.)

Another dig at SVB, is that they haven’t have a chief risk officer, prior to this Jan, for 9 months. Something seriously wrong there. SVB had no official chief risk officer for 8 months | Fortune

I would buy the stock of a number of the banks on that list. Owning a security in a rising rate environment looks bad if you mark to market that asset. But you can hold it to maturity and get 100% of your principal back. Does that cause you some liquidity stress? Yeah but that is what fed funds and the discount window is for. Plus you can shrink your loan portfolio, which is paying down every month if you stop lending.

The fed messed up with these rate increases. The y were trying to fight a phony war with nuclear weapons.

I agree that this is a liquidity issue. SVB died because they made bets on 10-Y T notes with a HUGE amount of money without a hedge in order to protect their liabilities to their dwindling client base. They should have laddered the investments accordingly to allow for access to capital over time and probably prevented them from FDIC getting involved. This is poor financial management without thinking what would happen to prevent a cooling tech sector and a decreasing, new customer base.

I wouldn’t call it a phony war. Our debt is wildly out of control and in order to control inflation, rates have to be raised (it’s a blunt weapon tool, of course). Not even Paul Volcker styled repair could handle what is going on with our inflationary issues.

The issue ends up being, who should hurt more? People or financial institutions? Banks that cannot manage risk should fail and done so, in a raging fire and executives involved should be held liable with serious (10+ years) jail time.

I agree, they violated a rule in banking which is keep your investment and loan horizon short. It just wasn’t a very well run bank. But their incompetence isn’t a signal of a wider forest fire. It was just dumb and bad banking practices.

1 Like

@Coog51 100% agree. How many more are involved in this kind of practice? :sweat_smile:

@norbert I think there’s a common misconception about mark-to-market or fair value accounting. It’s not a bad thing, but it does provide plenty of comfort in the what-ifs. Unless you read where the investments are located in their reports, like the debt is in government bonds, that means it’s plenty secure, but you have to have comfort that the bank can handle rising rates and has enough liquidity on-hand that post-Dodd-Frank regulation requires for big banks.

What I am unsure about is, how protected banks like BOA are from the looming issues from the potential failure of corporate mortgage-backed securities.

No big deal, they’ll just turn on the printing presses, never notice until your eggs are $12 a dozen. :rofl::rofl::rofl:

Meh, egg prices are dropping fast. Got my last dozen for less than $3. It was always supply chain issues.

My other barometer are avocados. They went all the way up to $8 at Costco. Now they are back down to $3.50.

Frontline is doing a piece on the End of the Era of Easy Money. I’m recording it


Eggs? Avocados? Sheesh

Larry Fink is predicting extended inflation for years. He also discusses a “third domino”. I hate the guy but I read what he writes

It was almost free money at some points. If your interest rate is less than inflation, you win brother.

1 Like
1 Like

Anyone thinking it’s a good time to invest in bank stock funds now ?

Here is one, FSRBX, that’s dropped 20-30% in last few days.

Depends on your time horizon

1 Like

Eggs down. Avocados down…and now oil…down 13% in 5 days.

Are interest rates the leading cause of inflation now?

None of which are part of the core. They take groceries & oil out of the core.

While they can take it out as a direct measure, every single product sold has an energy cost.

1 Like
1 Like