How did SVB get to where it is today
The bank’s profit model
SVB (Silicon Valley Bank) is similar to many traditional savings banks, which also absorb deposits and issue loans at higher interest rates to earn interest spreads. But it is not for C-end customers, only for B-end customer business.
The deposit and loan spread income is usually called NII (Net Interest Income, Net Interest Income). NII is the biggest source of profit for SVB. As shown in the figure below, the proportion has increased from 55% to about 73% in the last three years (a total nominal income of 1.728 billion):
How did you lose money?
How did you lose money?
SVB’s NII mainly comes from two business areas: 1) a large number of start-up loans in Silicon Valley; 2) fixed investment income, mainly treasury bonds and MBS (mortgage bonds). Therefore, if the following two situations occur, SVB will face losses:
1)Silicon Valley startups default on their debt, pay off their loans or default on their debt, and/or
2) The Fed’s benchmark interest rate rose midway. At this point, SVB must sell its own available-for-sale assets (AFS) to make up for the shortfall caused by the start-up’s default. In addition, the rise in interest rates has also led to an increase in SVB’s cost of funds on the customer savings side (liability side), while the interest income from its loans has remained fixed, because SVB has invested heavily in fixed-rate U.S. Treasury bonds and other held-to-maturity bonds (HTM , Held To Maturity). Therefore, being forced to sell AFS leads to a decrease in its profitability, that is, a decrease in NIM (Net Yield Yield), as shown in the figure below. The figure below shows the asset composition of SVB. On the asset side, its AFS+HTM investment accounts for 92% of its total investment, of which only RMBS investment accounts for 55%, and corporate bonds and investment portfolios account for only 8%. This FI structure leads to a sharp decline in the ability of the Federal Reserve to earn money on investment when the Fed continues to raise interest rates (expected to drop to -1.85%~-1.95% in 2023), because the proportion is indeed too high.
How did the decoupling happen?
How much fixed investment property did SVB sell? According to public information, as of March 8, SVB announced that it would sell almost all of its AFS (available for sale) fixed investment portfolio of approximately US$16 billion, which resulted in a write-down of US$1.8 billion in assets. What is the concept of 1.8 billion US dollars? It is equivalent to the net income of SVB for one year-all the money earned in 2022 has been lost, and it is not enough. In order to fill this shortfall, it needs to raise $1.75 billion or equivalent tradable assets in the shortest possible time (the actual process is about 48 hours, 2 trading days). But SVB’s statement sparked panic among customers. According to the report of the California financial regulatory authority, as of the close of business on March 9, SVB customers have withdrawn a total of $42 billion in cash, and the SVB cash balance quickly turned to -$958 million, but they failed to raise the required funds from other sources 1.75 billion shortfall. On March 10, as the stock price plummeted, SVB finally gave up the way of selling stocks to cash out, which means that the efforts of asset sales also failed.
It can be seen that after SVB announced the sale of about US$16 billion of AFS, resulting in a book loss of US$1.8 billion, due to:
a) the echo chamber effect of the market;
b) expected self-fulfillment effects;
c) Liquidity issues.
These factors together make the market believe that -1.8 billion will not be the end. So everyone ran to get the money.
After SVB is frozen, is the rest of the client assets safe?
The Federal Reserve has liquidity regulatory requirements for banks, requiring banks to maintain sufficient “liquidity reserves” (LCR, liq. coverage), that is, to have enough high-liquidity assets to cover 30 days of payment expectations, and SVB’s current LCR About 250%, the amount of more than 2 months. Therefore, in theory, as long as not all customers come to run, SVB can still maintain a roughly stable asset structure.
As mentioned earlier, 90% of SVB’s assets are various FIs and claims on corporate loans, and they have been recovered: 80% of FIs (80% x $117.4B = $94 billion) and 80% of loans (80% x $70B = $56 billion), which amounts to about 150 billion, which corresponds to a total deposit of $173 billion, so it does not seem to be a big problem. In addition, according to regulatory requirements, each account has a deposit insurance worth a total of $250,000. Although these insurances are not fully applicable to the affected part of SVB, it is still an existing asset that can be used for subsequent coordination.
Summarize
In my opinion, FTX’s thunderstorm some time ago played an important role in promoting the formation of this run. Those debts caused by FTX’s irresponsible behavior were turned into cryptocurrencies, forming the initial big hole. This is a pit created out of thin air by moral hazard, not a liquidity problem. Of course, you can continue to go back and say that the FTX thunderstorm is due to the fact that funds left cryptocurrency investment due to the Fed’s interest rate hike, and the Fed’s interest rate hike can continue to be traced back to the excessive monetary easing that was forced during the covid period. However, on the whole, it is qualitatively different from 2008, because it was not caused by large-scale mortgage defaults, and the rigidity of redemption is weak.
