Looking to get some clarification because maybe I’m missing something.
Everyone keeps talking about how only 3% of SVB customers are FDIC insured and that most accounts had millions so even those that were insured will eat the loss on the difference of a 250k FDIC insurance payout. But SVB is not ~Broke~ they’re just illiquid. They have something like around 180 billion in assets and 160 billion in deposits. And they’re a commercial bank not an investment bank, so basically they make money by taking customer deposits and then using that cash to originate loans to other customers or maybe buying pretty stable assets like long term MBS or Treasury Bonds. So it’s not like they lost customer money selling highly complex Tuna bonds in Mozambique or something, their assets (long term securities) outweigh their liabilities (depositors money). There isn’t any fraud (that we know of) or impropriety. The industry they served just became too cash hungry and they failed to reposition/compensate for the discrepancy in short term obligations and long term assets. It’s a problem of timing not of the balance sheet.
Their fire sale of 21 billion in bonds was to provide liquidity to meet withdrawals and yielded a loss of 8.5%. Which is high for sure and nothing to scoff at, but it’s not cataclysmic. If all of their assets are long term securities with bad interest rates they’re not ~worthless~, they’re just worth ~less~ then their base value plus total interest at maturity. And that’s because when you sell them in the open market now during this time where new interest rates are higher, you get less for them. It seems to me that all they need is for the FDIC to find a deep pocketed bank to buy ownership for almost nothing and provide A) confidence to depositors that their money is safe and they can stop withdrawing it all at once and B) Bridge the liquidity gap to meet continued withdrawals until they can sell off the long term assets at a loss. Even if the losses are twice as bad as the bond fire sale, 15% loss on 180billion is not far from 160.
So my question is, why does it seem like everyone is saying all the customers of SVB will lose all their money? What am I missing? Am I too optimistic on the asset value and the fact is the long term securities SVB has are indeed worthless? Is the liquidity gap between short term obligations and selling of assets too great that no other bank will touch this? And on a stock note, this is technically a bankruptcy right? All proceeds from sales of assets go to creditors (in this case depositors) and stock holders get nothing? This is my first major bank failure that I wasn’t in middle school for so I don’t know how this works.
Leave a Reply