FED
A few thoughts on the unfolding SVB Financial situation and what it means for Fed policy:
- SVB's story and share price collapse yesterday appears to be fairly straightforward: rising US interest rates resulted in a combination of 1) losses on MBS and other fixed income security holdings 2) increasing short-end funding costs (ie rates paid on client deposits) 3) SVB's unusually high exposure to the waning tech/start-up space (which meant deposit flow has dwindled vs huge inflows in 2019-21 during the tech boom).
- The first issue of unrealized losses on fixed income securities as rates rise is well known across the sector - take for example the chart below from the FDIC's Q4 banking profile showing a total $620B of unrealized losses as of Q4 2022. SVB yesterday decided to realize their paper losses and raise equity, which came as a surprise. With large unrealized losses remaining, and their decision yesterday to realize some now, there remain questions over whether they will have to sell more to cover a loss of client deposits which may leave the bank amid this crisis (as widely reported overnight).
- The second appears to be an increasing problem for deposit-dependent banks, which are having to compete for funding with the likes of risk-free 6M Tbills paying 5+%.
- From a systemic perspective, this all appears to be manageable. With regulation since then, it is not like 2007-08 when banks were under-capitalized and had massive amounts of high-risk assets on the balance sheet. But clearly, the rapid Fed rate hike cycle of the past year is beginning to create cracks in the banking system.
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