Bank failures always the same: The case of SVB

“Happy families are all alike; every unhappy family is unhappy in its own way.” - Anna Karenina

It is one of the most famous lines by Leo Tolstoy and is true about families but may not be true of not bank failures. A bank failure like Silicon Valley Bank (SIVB) has some very familiar characteristics. The facts are still being sorted out, but we can say that this failure has similar characteristics of other bank failures. 

The classic failure characteristics were obvious risks that went unnoticed by all parties. There was an asset liability issue. There was herding and contagion. There was a liquidity issue. There was no black swan event but a pink flamingo risk staring at us. Of course, most of the events always seem obvious after the fact.

SIVB was a simple story. Large deposit growth in 2019-2021 relative to the loan portfolio meant that the bank invested in Treasuries and mortgages to stay liquid and gain a return. These bonds were place in the HTM (held to maturity) account unhedged given they were held at book value. Losses on the bond portfolio grew as rates rose, but the losses were not realized given they were held at book. 

Deposits started to decline as rates rose. This is a bank industry problem. Money markets and Treasury rates were higher than bank deposits, so investors pulled money from banks to grab the higher yields from Treasuries. We see this in flows through the growth in Treasury holding by households and the decline in deposits especially at non-money center banks. 

To meet the depositor withdrawals, Treasuries had to be sold at a loss. These losses eat into bank capital. The problem is not based on bad credit but bad asset liability management which is a liquidity issue. Their assets have a longer maturity than liabilities. This was a rate bet that went wrong.

Once these issues become apparent to many investors, the contagion and herding takes place. As more deposits leave, more assets have to be sold, and a further decline in equity. The spiral of decline accelerates which leads to the current failure.

Now investors will start to look at other banks with the same characteristics. The rise in rates is now becoming a stress point for banks.