Bloomberg Law
March 10, 2023, 2:54 PM

SVB’s Giant Treasury Book, Tech Focus Made It Uniquely Shaky (1)

Jenny Surane
Jenny Surane
Bloomberg News

Bank investors are grappling with the question of whether SVB Financial Group’s troubles are an isolated case or a harbinger of industry-wide shock. The answer, for now, is that it is facing an extreme version of an issue hitting all banks — plus some problems that are unique.

All US lenders parked a chunk of their money in Treasuries and other bonds that dropped in value last year amid the Federal Reserve’s rapid rate hikes to contain inflation. But SVB took it to a different level: its investment portfolio swelled to 57% of its total assets. No other competitor among 74 major US banks had more than 42%.

And while higher rates have made all banks fret about depositors going elsewhere, most lenders have very broad customer bases spread among individuals and companies. SVB grew rapidly thanks to its focus on tech startups as its primary clients.

“Once the initial shock has had some time to fade, people will realize that this bank is very different in nature compared to more traditional banks,” said Mark Naur, a strategist at Danske Bank AS. “While rising rates is overall very good for banks, some will have asset-liability mismatches that can get them in trouble.”

The bank said this week it offloaded a big chunk of its bond investments at a loss to increase its liquidity. Fears of an exodus of client deposits prompted shares to drop 60% on Thursday with another steep fall in early trading Friday.

Special case or not, bank investors aren’t waiting around to see how unique the problems are. In the US, the KBW Bank Index had its worst day since June 2020, as its members shed more than $90 billion of value. In Europe, the biggest banks lost more than $40 billion off their market caps on Friday.

While SVB was the worst performer of any company in the S&P 500 Index on Thursday, the index’s second worst performer was First Republic Bank, another California lender that banks startups and technology companies. PacWest Bancorp, which counts on venture capitalists for a third of its deposits, also slumped 25%.

Unrealized Losses

In all, US banks’ had booked $620 billion in unrealized losses on their available-for-sale and held-to-maturity portfolios at the end of last year, according to filings with the Federal Deposit Insurance Corp. The agency noted this month that those paper losses “meaningfully reduced the reported equity capital of the banking industry.”

Banks have been so profitable that for most of them, the paper losses have limited their potential stock buybacks but not otherwise been a major issue.

WATCH: Bloomberg Television guests discuss whether Silicon Valley Bank is cause for contagion to the greater banking sector.
Source: Bloomberg

“All people who’ve been around banking would say higher rates in sort of a stable environment is good for banks in the long run, it can be painful getting there,” KeyCorp Chief Strategy Officer Clark Khayat told investors this week after previously warning the country’s 20th largest bank would consider a sale of the available-for-sale securities if the deal was “economically positive.”

Those unrealized losses don’t appear on the firms’ income statement, but some do affect lenders’ so-called accumulated other comprehensive income, or AOCI. Many banks also had other hedges that offset some of the losses. Swings in AOCI impact shareholder equity, the drop in AOCI has weighed on key capital ratios, forcing some to curtail share repurchases.

Some of SVB’s problems are specific to the company’s focus on venture capital-backed startups. For months, the company has warned that it’s been beset with deposit outflows as those firms burned through cash. Venture capital funding has largely dried up, meaning there wasn’t a way for those clients to replenish the money.

The company — along with other banks — also misjudged just how quickly the Federal Reserve would raise interest rates to dampen down once-in-a-generation levels of inflation. At the height of the pandemic, as deposits soared and loan growth was scarce amid exuberance in venture markets, SVB joined rivals in loading up on mortgage-backed securities and other bonds in a hunt for better yielding assets.

That differed from players like JPMorgan Chase & Co., which initially faced investor pushback when it didn’t immediately plow excess deposits into securities. Still, the move proved prescient as the Federal Reserve last year aggressively raised benchmark rates. Chief Financial Officer Jeremy Barnum elaborated on the move last month.

“The cash position in simple terms, one reason for it to be elevated is simply the recognition of the amount of surplus liquidity in the system,” Barnum said at a conference. “Deposits are going to come down and it’s just easier and more straightforward to let that flow out of the cash balances rather than have to readjust securities positions when that happens.”

Even after months of headlines, this week’s news came as a shock to investors.

In January, when asked if the company was considering restructuring its balance sheet, Chief Financial Officer Daniel Beck was adamant the company wasn’t looking to make any wholesale challenges to its available-for-sale portfolio of securities.

A month earlier, Beck said the company was able to move certain customers into an off-balance sheet product that gave the company $90 billion of liquidity. He also noted the firm is able to borrow against its investment securities portfolio.

“So you’ve got $70 billion worth of additional capacity there before you even get to the available-for-sale book,” Beck said.

(Updates with JPMorgan details in 14th, 15th paragraphs.)

--With assistance from Jan-Patrick Barnert, Priscila Azevedo Rocha, Marion Dakers and Hannah Levitt.

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Jenny Surane in New York at

To contact the editors responsible for this story:
Sally Bakewell at

Michael J. Moore, Tom Metcalf

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