As of 14 March 2023
Silicon Valley Bank (SVB), which focused on lending to technology startups, announced a common stock offering on March 8 in conjunction with a large bond sale from their investment portfolio in order to raise cash and equity capital. The bank had been facing liquidity challenges amid deposit outflows. The bond sale from their investment portfolio crystallized unrealized losses as a result of rising interest rates and negatively impacted capital ratios.
In response, US regulators placed SVB into receivership on March 10. This came after the announced liquidation of Silvergate Bank (SI), which focused on providing banking services for the cryptocurrency industry. Amid sharp increases in interest rates over the past year, the market value of these banks’ assets declined. This wouldn’t necessarily be a problem under normal circumstances, as many of the assets were marked as "held to maturity." The trouble is that both banks also experienced pressure on their liquidity positions as their niche industries — crypto for SI and tech for SVB — concurrently suffered deposit outflows. This forced the banks to sell their available-for-sale securities at losses in order to rebuild their liquidity positions. We believe these two events to be idiosyncratic, but they do highlight one side effect of central banks' rapid increase in short-term interest rates after a lengthy period of low rates.
To restore public confidence, US regulators swiftly invoked a “systemic risk exception” two days later, allowing the Federal Deposit Insurance Commission (FDIC) to backstop both insured and uninsured deposits at SVB and another recently failed bank, Signature Bank. Importantly, none of the losses will be borne by US taxpayers, but instead by existing banks in the system through their insurance premiums.
Additionally, the US Federal Reserve (Fed) announced that it would make funding available to eligible depository institutions through a new Bank Term Funding Program (BTFP). This program allows banks to place US Treasuries, agency mortgage-backed securities, and other eligible collateral (which have declined sharply in value over the past year) at the Fed. In exchange, the banks will receive face value back in the form of a one-year loan. The BTFP can serve as an additional source of liquidity against high-quality securities, eliminating an institution's need to quickly sell those securities in times of stress. The Treasury will make US$25 billion available from its Exchange Stabilization Fund to prop up the BTFP.
The situation remains highly fluid. Early in the week following SVB’s failure, bank stocks came under pressure, credit spreads moved wider, and Treasury yields sharply declined, reflecting both a flight to quality and a repricing of future Fed policy rates. Most currencies rallied versus the US dollar, led by higher-beta ones. At the time of writing, some of these moves have partially retraced, as markets perceive that forceful US policy action has been able to contain the fallout for now.