Link between US Fed’s interest rate hikes and fall of Silicon Valley Bank

The collapse of Silicon Valley Bank(SVB) is linked to Fed’s interest rate hikes, let’s unravel this phenomenon.

All would have gone well, if SVB was not forced to realise the loss on it’s MBS holdings

SVB kept most of its depositors’ deposits invested in Mortgage Backed Securities(MBS), these are fixed income instruments which regulators have rated as being very safe and low risk assets to hold.

However, as FED began its interest rate hikes, the value of these MBS fell, so SVB was piling up on temporary unrealised losses. Post maturity of MBS holding period, investors get back their invested capital, so the fall in value of MBS was only concerning, if the bank is forced to sell MBS assets at a loss, to honour sudden spike on depositors’ withdrawal requests.

Summary of how SVB became bankrupt

SVB had invested $120 billion of its depositors funds in these kinds of MBS securities. There were unrealised losses on this securities investment, but there was no requirement to report this in the bank’s balance sheet, as this loss was only on paper if these investment securities were held till maturity.

Unfortunately, a bank run began with customers withdrawing their funds, and to honour customer withdrawals, SVB was forced to sell its investment securities realising a loss of about $1.8 billion.

Now, SVB’s balance sheet had more liabilities than assets, it was short in funds. SVB tried to reposition its balance sheet by selling its shares and raising $2.25 but it did not fall through.

SVB was eventually declared bankrupt.

It was the vast majority of SVB’s uninsured depositors that triggered the bank run

92% of SVB’s depositors were uninsured, as Federal Deposit Insurance Corporation(FDIC) offers every account holder cover only uptill $250,000, beyond this amount there is no insurance cover.

Source

It was these uninsured depositors who withdrew in large numbers triggering a bank run that led to SVB’s collapse.

Price decline of MBS assets due to US Fed’s rate hikes

Source. Declining prices of Mortgage linked investment security products since Fed began hiking up interest rates

Prices of MBS fell as rate hikes took effect. Demand for Mortgage loans fell, be it for regular home loan or commercial real estate, meanwhile defaults on these loans increased. So, prices of MBS crashed with FED’s interest rate hikes.

There is another aspect to this as well, FED has been reducing its balance sheet by dumping MBS it holds that it otherwise generally kept buying earlier when FED was practising Quantitative easing monetary policy.

This is explained well by Nicholus Mertin in his Datadash channel here -:

More US Banks in danger of collapsing should a bank run occur

There are atleast 190 US banks who are at a risk of collapsing if a bank run should occur, as they too have invested majority of their depositors’ deposits on MBS and other such securities like commercial real estate loans, U.S bonds, and other asset-backed securities (ABS) whose mark to market value has declined as a consequence of FED’s rate hikes. An economic analysis report says that these banks sit on 600$ Billion unrealized losses!!

On an average, these banks have 50% uninsured depositors and if these depositors withdraw their deposits, it would impair the ability of these banks to pay up its insured depositors. About 300$ billion of insured depositors’ money is at risk this way.

Many banks have more unrealised losses than what SVB had. No wonder, US banks have lost so much of their value on the financial market, it’s reflective of the lack of consumer trust on the US Banking sector.

Source. Steep decline in the value of US bank stocks due to fears of banking crisis in USA

You can read learn about those details reading these two articles -

Falling Bank Asset Values Depict ‘Fragility’ to Uninsured Depositors, $300B at Risk

More than 186 US banks well-positioned for collapse, SVB analysis reveals

Thank you for reading!!

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