I dunno how a bank of that size could have overlooked risk management. I mean, with high inflation everywhere, everyone KNEW (in 2022) that the Fed would raise the interest rates.
Silicon Valley Bank Financial in talks to sell itself after attempts to raise capital have failed
- Thread starter gwb-trading
- Start date
From what i heard, they weren't allowed to hedge. You can't hedge available for sale or held to maturity securities per accounting rules.
I dunno how a bank of that size could have overlooked risk management. I mean, with high inflation everywhere, everyone KNEW (in 2022) that the Fed would raise the interest rates.
Whoever executed risk management measures was just not knowledgeable and chose the wrong instruments. This bank is not really a "financial" in terms of dealing with financial investment securities. This is a bank that specializes in corporate finance and venture capital investments that deals more with hard assets or value-added assets and ventures so I am willing to willing to give them the benefit of the doubt that they just don't understand how a change in interest rates impact the yield of fixed income instruments. It's like asking somebody who's a software salesman to all of suddenly trade bonds.
Still feed bad for the bank that it failed though.
Of course the bank knew their pvbp. This is like finance 101. Just because theDawn doesn’t understand interest rates, or vol, or stocks, doesn’t mean that no one else does.
First Republic Shares Sink in Sign of Broadening SVB Contagion
The turmoil following the collapse of Silicon Valley Bank continued to spread Monday, with First Republic Bank shares falling about 60% in pre-market trading despite efforts by the US regional lender to reassure investors on its liquidity.
The declines came after the bank said in a statement late Sunday that it had more than $70 billion in unused liquidity to fund operations from agreements that included the Federal Reserve and JPMorgan Chase & Co.
“The additional borrowing capacity from the Federal Reserve, continued access to funding through the Federal Home Loan Bank, and ability to access additional financing through JPMorgan Chase & Co. increases, diversifies, and further strengthens First Republic’s existing liquidity profile,” the bank said.
The assurances failed to win over investors with many rushing for safety in US and German debt, underlining concerns over the potential for rising interest rates to uncover hidden risks elsewhere. That’s despite analysts including at Deutsche Bank AG and Citigroup Inc. saying the SVB crisis had little bearing on the outlook for lenders in the region which have recently posted robust profits.
More liquidity is available through the Fed’s new lending facility, according to the statement.
The announcement came after First Republic’s liquidity came under pressure along with other regional banks after SVB Financial Group’s banking unit collapsed into receivership on Friday.
Read More: SVB Collapse Has Little Bearing on Europe’s Banks, Analysts Say
In the UK, HSBC Holdings Plc is buying SVB’s UK arm, after a frantic weekend where ministers and bankers explored various ways to avert the SVB unit’s collapse.
BaFin announced Monday that it had frozen SVB’s branch in the country. Silicon Valley Bank Germany Branch will not be allowed to sell assets or make payments because it’s at risk of not being able to fulfill commitments to creditors, BaFin said in a statement.
The German operations aren’t considered to be systemically relevant, BaFin said. The Frankfurt-based institution’s balance sheet amounted to €789.2 million ($842.3 million) at the end of last year and doesn’t take deposits, according to the regulator.
Shares at Credit Suisse Group AG tumbled 15% on Monday morning, without any evidence of a clear link to the SVB crisis. The troubled Swiss lender is in the midst of a complex overhaul and has struggled to hold on to client cash amid concerns over its return to profitability.
Read More: HSBC Buys SVB’s UK Unit for £1 in Reprieve for Tech Sector (2)
Before SVB’s collapse, analysts at Bloomberg Intelligence saw First Republic as potentially posting better loan growth and asset quality than its peers, as it focuses on high net worth individuals in urban markets and has a “conservative credit culture.”
For the full BI note on First Republic click here.
- U.S. bank says Fed, JPMorgan Push Liquidity to $70 Billion
- Says more liquidity available via Fed’s new lending facility
The turmoil following the collapse of Silicon Valley Bank continued to spread Monday, with First Republic Bank shares falling about 60% in pre-market trading despite efforts by the US regional lender to reassure investors on its liquidity.
The declines came after the bank said in a statement late Sunday that it had more than $70 billion in unused liquidity to fund operations from agreements that included the Federal Reserve and JPMorgan Chase & Co.
“The additional borrowing capacity from the Federal Reserve, continued access to funding through the Federal Home Loan Bank, and ability to access additional financing through JPMorgan Chase & Co. increases, diversifies, and further strengthens First Republic’s existing liquidity profile,” the bank said.
The assurances failed to win over investors with many rushing for safety in US and German debt, underlining concerns over the potential for rising interest rates to uncover hidden risks elsewhere. That’s despite analysts including at Deutsche Bank AG and Citigroup Inc. saying the SVB crisis had little bearing on the outlook for lenders in the region which have recently posted robust profits.
More liquidity is available through the Fed’s new lending facility, according to the statement.
The announcement came after First Republic’s liquidity came under pressure along with other regional banks after SVB Financial Group’s banking unit collapsed into receivership on Friday.
Read More: SVB Collapse Has Little Bearing on Europe’s Banks, Analysts Say
In the UK, HSBC Holdings Plc is buying SVB’s UK arm, after a frantic weekend where ministers and bankers explored various ways to avert the SVB unit’s collapse.
BaFin announced Monday that it had frozen SVB’s branch in the country. Silicon Valley Bank Germany Branch will not be allowed to sell assets or make payments because it’s at risk of not being able to fulfill commitments to creditors, BaFin said in a statement.
The German operations aren’t considered to be systemically relevant, BaFin said. The Frankfurt-based institution’s balance sheet amounted to €789.2 million ($842.3 million) at the end of last year and doesn’t take deposits, according to the regulator.
Shares at Credit Suisse Group AG tumbled 15% on Monday morning, without any evidence of a clear link to the SVB crisis. The troubled Swiss lender is in the midst of a complex overhaul and has struggled to hold on to client cash amid concerns over its return to profitability.
Read More: HSBC Buys SVB’s UK Unit for £1 in Reprieve for Tech Sector (2)
Before SVB’s collapse, analysts at Bloomberg Intelligence saw First Republic as potentially posting better loan growth and asset quality than its peers, as it focuses on high net worth individuals in urban markets and has a “conservative credit culture.”
For the full BI note on First Republic click here.
There are numerous other banks at risk...
20 banks that are sitting on huge potential securities losses — as was SVB
SVB Financial faced a perfect storm, but there were plenty of other banks with high levels of unrealized securities losses as of Dec. 31
https://www.marketwatch.com/story/2...ities-lossesas-was-svb-c4bbcafa?siteid=yhoof2
Silicon Valley Bank failed on Friday following a run on deposits, after its parent company’s share price crashed a record 60% on Thursday.
Trading of SVB Financial Group’s stock SIVB, -60.41% had been halted early Friday, after the shares plunged again in premarket trading. Treasury Secretary Janet Yellen said SVB was one of a few banks she was “monitoring very carefully.” Reaction poured in from several analysts who discussed the bank’s liquidity risk.
California regulators closed Silicon Valley Bank and handed the wreckage over to the Federal Deposit Insurance Corp. later on Friday. Signature Bank of New York, (the main subsidiary of Signature Bank Corp. SBNY, -22.87%, was closed by state regulators and taken over by the FDIC on Sunday.
Below is the same list of 10 banks we highlighted on Thursday that showed similar red flags to those shown by SVB Financial through the fourth quarter. This time, we show how much they reported in unrealized losses on available-for-sale, or AFS, securities — an item that played an important role in SVB’s crisis.
Below that is a screen of U.S. banks with at least $10 billion in total assets, showing those that appeared to have the greatest exposure to unrealized securities losses on AFS securities, as a percentage of total capital, as of Dec. 31.
The latest industry developments include an emergency lending facility set up by federal regulators to help banks avoid selling securities for losses if they need to raise cash to cover deposit outflows. The regulators have also said all depositors of Silicon Valley Bank and the failed Signature Bank of New York would have access to their money — even uninsured deposit balances. First Republic Bank FRC, -14.84% (listed below) announced it had secured funding from the Federal Reserve and JPMorgan Chase & Co. JPM, +2.54%.
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 RUA, -1.70% as of Dec. 31. That makes its collapse the largest U.S. bank failure since that of 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 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.
Unrealized losses on securities
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:
Here’s how accumulated other comprehensive income, or 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
On the regulatory call reports, AOCI is added to regulatory capital. Since SVB’s AOCI was negative (because of its unrealized losses on AFS securities) as of Dec. 31, it lowered the company’s total equity capital. So a fair way to gauge the negative AOCI to the bank’s total equity capital would be to divide the negative AOCI by total equity capital less AOCI — effectively adding the unrealized losses back to total equity capital for the calculation.
Getting back to our list of 10 banks that raised similar red margin flags to those of SVB, here’s the same group, in the same order, showing negative AOCI as a percentage of total equity capital as of Dec. 31. We have added SVB to the bottom of the list. The data were provided by FactSet:
Ally Financial Inc. ALLY, -5.70% — the third largest bank on the list by Dec. 31 total assets — stands out as having the largest percentage of negative accumulated comprehensive income relative to total equity capital as of Dec. 31.
To be sure, these numbers don’t mean that a bank is in trouble, or that it will be forced to sell securities for big losses. But SVB had both a troubling pattern for its interest margins and what appeared to be a relatively high percentage of securities losses relative to capital as of Dec. 31.
Banks with the highest percentage of negative AOCI to capital
There are 108 banks in the Russell 3000 Index RUA, -1.70% that had total assets of at least $10.0 billion as of Dec. 31. FactSet provided AOCI and total equity capital data for 105 of them. Here are the 20 which had the highest ratios of negative AOCI to total equity capital less AOCI (as explained above) as of Dec. 31:
Again, this is not to suggest that any particular bank on this list based on Dec. 31 data is facing the type of perfect storm that has buffeted SVB Financial. A bank sitting on large paper losses on its AFS securities may not need to sell them. In fact Comerica Inc. CMA, -5.01%, which tops the list, also improved its interest margin the most over the past four quarters, as shown here.
But it is interesting to note that Silvergate Capital Corp. SI, -11.27%, which focused on serving clients in the virtual-currency industry, made the list. It is shuttering its bank subsidiary voluntarily.
Another bank on the list facing concern among depositors is Signature Bank SBNY, -22.87% of New York, which has a diverse business model but has also faced a backlash related to the services it provides to the virtual-currency industry. The bank’s shares fell 12% on Thursday and were down another 24% in afternoon trading on Friday.
Signature Bank said in a statement that it was in a “strong, well-diversified financial position.”
20 banks that are sitting on huge potential securities losses — as was SVB
SVB Financial faced a perfect storm, but there were plenty of other banks with high levels of unrealized securities losses as of Dec. 31
https://www.marketwatch.com/story/2...ities-lossesas-was-svb-c4bbcafa?siteid=yhoof2
Silicon Valley Bank failed on Friday following a run on deposits, after its parent company’s share price crashed a record 60% on Thursday.
Trading of SVB Financial Group’s stock SIVB, -60.41% had been halted early Friday, after the shares plunged again in premarket trading. Treasury Secretary Janet Yellen said SVB was one of a few banks she was “monitoring very carefully.” Reaction poured in from several analysts who discussed the bank’s liquidity risk.
California regulators closed Silicon Valley Bank and handed the wreckage over to the Federal Deposit Insurance Corp. later on Friday. Signature Bank of New York, (the main subsidiary of Signature Bank Corp. SBNY, -22.87%, was closed by state regulators and taken over by the FDIC on Sunday.
Below is the same list of 10 banks we highlighted on Thursday that showed similar red flags to those shown by SVB Financial through the fourth quarter. This time, we show how much they reported in unrealized losses on available-for-sale, or AFS, securities — an item that played an important role in SVB’s crisis.
Below that is a screen of U.S. banks with at least $10 billion in total assets, showing those that appeared to have the greatest exposure to unrealized securities losses on AFS securities, as a percentage of total capital, as of Dec. 31.
The latest industry developments include an emergency lending facility set up by federal regulators to help banks avoid selling securities for losses if they need to raise cash to cover deposit outflows. The regulators have also said all depositors of Silicon Valley Bank and the failed Signature Bank of New York would have access to their money — even uninsured deposit balances. First Republic Bank FRC, -14.84% (listed below) announced it had secured funding from the Federal Reserve and JPMorgan Chase & Co. JPM, +2.54%.
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 RUA, -1.70% as of Dec. 31. That makes its collapse the largest U.S. bank failure since that of 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 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.
Unrealized losses on securities
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:
- Available for sale; These securities (mostly bonds) can be sold at any time, and under accounting rules are required to be marked to market each quarter. This means gains or losses are recorded for the AFS portfolio continually. The accumulated gains are added to, or losses subtracted from, total equity capital.
- Held to maturity: These are bonds a bank intends to hold until they are repaid at face value. They are carried at cost and not marked to market each quarter.
Here’s how accumulated other comprehensive income, or 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
On the regulatory call reports, AOCI is added to regulatory capital. Since SVB’s AOCI was negative (because of its unrealized losses on AFS securities) as of Dec. 31, it lowered the company’s total equity capital. So a fair way to gauge the negative AOCI to the bank’s total equity capital would be to divide the negative AOCI by total equity capital less AOCI — effectively adding the unrealized losses back to total equity capital for the calculation.
Getting back to our list of 10 banks that raised similar red margin flags to those of SVB, here’s the same group, in the same order, showing negative AOCI as a percentage of total equity capital as of Dec. 31. We have added SVB to the bottom of the list. The data were provided by FactSet:
Ally Financial Inc. ALLY, -5.70% — the third largest bank on the list by Dec. 31 total assets — stands out as having the largest percentage of negative accumulated comprehensive income relative to total equity capital as of Dec. 31.
To be sure, these numbers don’t mean that a bank is in trouble, or that it will be forced to sell securities for big losses. But SVB had both a troubling pattern for its interest margins and what appeared to be a relatively high percentage of securities losses relative to capital as of Dec. 31.
Banks with the highest percentage of negative AOCI to capital
There are 108 banks in the Russell 3000 Index RUA, -1.70% that had total assets of at least $10.0 billion as of Dec. 31. FactSet provided AOCI and total equity capital data for 105 of them. Here are the 20 which had the highest ratios of negative AOCI to total equity capital less AOCI (as explained above) as of Dec. 31:
Again, this is not to suggest that any particular bank on this list based on Dec. 31 data is facing the type of perfect storm that has buffeted SVB Financial. A bank sitting on large paper losses on its AFS securities may not need to sell them. In fact Comerica Inc. CMA, -5.01%, which tops the list, also improved its interest margin the most over the past four quarters, as shown here.
But it is interesting to note that Silvergate Capital Corp. SI, -11.27%, which focused on serving clients in the virtual-currency industry, made the list. It is shuttering its bank subsidiary voluntarily.
Another bank on the list facing concern among depositors is Signature Bank SBNY, -22.87% of New York, which has a diverse business model but has also faced a backlash related to the services it provides to the virtual-currency industry. The bank’s shares fell 12% on Thursday and were down another 24% in afternoon trading on Friday.
Signature Bank said in a statement that it was in a “strong, well-diversified financial position.”
There’s a deeper story to Silicon Valley Bank’s failure. What can we learn from it?
https://www.theguardian.com/commentisfree/2023/mar/13/svb-collapse-2008-financial-crisis
https://www.theguardian.com/commentisfree/2023/mar/13/svb-collapse-2008-financial-crisis