Banks Lose Billions in Value After Tech Lender SVB Stumbles
Index of banks posts biggest drop since pandemic roiled markets nearly three years ago
By Jonathan Weil and Ben Eisen, The Wall Street Journal, March 9, 2023
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The four biggest U.S. banks lost $52 billion in market value Thursday…
hursday’s rout is another consequence of the Federal Reserve’s aggressive campaign to control inflation. Rising interest rates have caused the value of existing bonds with lower payouts to fall in value. Banks own a lot of those bonds, including Treasurys, and are now sitting on giant unrealized losses.
Large declines in value aren’t necessarily a problem for banks unless they are forced to sell the assets to cover deposit withdrawals. … Banks don’t incur losses on their bond portfolios if they are able to hold on to them until maturity. But if they suddenly have to sell the bonds at a loss to raise cash, that is when accounting rules require them to show the realized losses in their earnings…
The Federal Deposit Insurance Corp. in February reported that U.S. banks’ unrealized losses on available-for-sale and held-to-maturity securities totaled $620 billion as of Dec. 31, up from $8 billion a year earlier before the Fed’s rate push began…
“This is the first sign there might be some kind of crack in the financial system…People are waking up to the gravity that this was one of the biggest financial euphoria episodes.” [end quote]
Bond values fall when interest rates rise. Treasury debt, which has no default risk, is often portrayed as a low-risk investment (compared with stocks). But the risk of loss is very real when a period of low interest rates is followed by high interest rates.
The 10 year Treasury yielded only 0.55% on August 3, 2020, when the Federal Reserve suppressed interest rates with QT during the Covid emergency. A large portion of the billions of dollars of Covid relief fiscal stimulus was also stashed in safe bank accounts, suppressing interest rates.
Due to the Fed’s anti-inflation campaign, the 10 year Treasury yield is now close to 4%. Bonds that were bought in 2020 and 2021 are worth only a fraction of their book values. This is true of the Federal Reserve’s giant asset book as well as many banks. This isn’t a problem as long as the banks can cover their cash flow needs without selling the bonds until they mature – which could be up to 30 years from now.
Big banks hold a range of assets and serve companies across the economy, minimizing the risk that a downturn in any one industry will cause them serious harm. Small and focused banks like SVB and crypto banks are higher risk since they have lower liquidity.
All METARs are probably aware that the FDIC only insures $250,000 per owner so it is unwise to keep more than that at any FDIC-insured bank. Meanwhile, money market accounts at discount brokers yield over 4% so many bank customers are pulling out their savings from low-yield deposit accounts.
The large scale of unrealized losses won’t lead to a banking crisis as long as banks have enough liquidity to handle their cash needs. But runs on banks do happen…and bank stocks are part of indices and mutual funds that are being punished by the market.
Wendy