No. Not another Lehman moment. The system is safe though you wouldn't think so from the world reaction to the collapse of a relatively small bank. The Fed had to step in to save a run on the bank. Here's the story.
It seems that the bank was lending money to the Startup VC tech industry (... and also to the California wine industry curiously, the vineyards)
and one of the conditions for a start-up fledgling company being granted a loan was that it must also choose SVB for its bank account
So in other words SVB had a whole load of tech industry commercial account customers and almost no retail customer
in fact 90% of the money flushing through the bank came from commercial tech, it seems, which is most unusual and highly unbalanced. That is a risk that regulators should have spotted especially as the CEO of the bank also sits on the regional Fed board (hmmmmm...).
The money its customers placed with it, SVB very wisely invested in American government bonds. Nothing safer, you would think - these were long dated American government bonds meaning you are totally guaranteed to get back full par value at the end....if you hold it to the end, to maturity.
But like the LDI affair in the UK, interest rates started to go up up up some months ago, as we know, and this made it more and more difficult for some of its highly-indebted customers to repay their loan from their low startup revenues.
Some well-known celebrity (I forget his name) announced a few days ago that SVB was getting into difficulty - some customers were wanting to withdraw from their cash account to make loan repayments.
And so of course as soon as the word got around from that Bay area dinner table, many of the bank's customers started to get anxious and wanted to withdraw their money.
The money you remember had been put into safe long dated government bonds ... which now SVB had to sell, at whatever prices it could get.
It would have been ok if only the customers could have waited till the bonds could be sold at face (par) value ... the bank could have matched liabilities to assets according to the redemption dates of the bonds.
But they couldn't, the customers wanted their money now. So the bank was forced to sell off some of these bonds before maturity. But as we know, interest rates had risen since the bank had bought the bond, so the value of the bonds had fallen below par. The bank had to sell them off cheap, take a hit to its balance sheet. The bank had to mark the bonds to market prices ("mark to market" means you reconcile the value of your assets to market prices every three months, but this does not apply to long-dated bonds ... unless you sell them of course) and this is where the the assets were no longer able to cover the liabilities and why the Fed and FDIC had to step in, saving depositors but unlike 2008 this time the shareholders and unsecured Bond holders will pay and not the tax payers as in 2008. TO SAVE A RUN ON THE BANK.
Sad story. It is only a medium-sized bank with 210 billion dollars of assets, ie no risk to the banking system, and yet look at the, albeit temporary, damage to a fragile nervous world financial system from the uncertainty caused by this bank's collapse!
EPILOGUE 15 MARCH
1. BFTP will accept government bonds and similar at par value (most unusual) as collateral against insurance in the case of a bank needing to restructure, making bankruns a near impossibility.
2. They say the Fed will carry on raising rates until something breaks and it looks like something has just broken. So instead of 50 basis points at the next meeting it's more likely to be 25.
3. But the fight against inflation is ever more important - it is runni g at 10% now and that is on conventional measures - and this means the pause in Fed rate hikes can only be temporary.
4. HSBC UK has bought the bank for £1 which is a good deal for the UK albeit the HSBC share price fell 9% on the news.
5. Since the new BFTP guarantee referred to above does not cover uninsured loans, this is likely to reprice risk, raising the cost of capital for banks and thus lowering their margins and their share prices.
6. Yes this is a good moment to buy the dips and in particular tactical trades on regional US banks, or there is an ETF, $KRE, that specialises in regional US banks. It has fallen considerably and it's a good moment to buy and resell once price has reverted to the mean, given that there is now very little risk in future of similar bank runs.
0 comments:
Post a Comment
Keep it clean, keep it lean