The Investment Scientist

In this article, I will not discuss the Credit Suisse collapse and rescue that just happened less than ten hours ago, since I don’t understand the Swiss banking system as well as I understand the US system. Here in the United States, we have had a rapid succession of specialty bank collapses: Silvergate Bank, Silicon Valley Bank (SVB) and Signature Bank. Most of their depositors are super wealthy people or businesses whose deposits amount to much more than the 250k guaranteed by the FDIC. The majority of American banks do not have that kind of customer profile and the majority of American depositors have less than $250k in their bank accounts. Does that make the rest of the banks in America safe? I am afraid not. 

Though the depositor profiles may be different, all banks invest in the same “safe” government or government-backed debt securities, and all banks have unrecognized losses in those securities. By some estimates, the entire US banking system has $660B in unrecognized losses. 

There is so much to write about the Silicon Valley Bank (SVB) collapse and the subsequent government rescue plan. Let me start by saying that I do agree that the government’s action has arrested a panic that could lead to a domino of bank collapses. In today’s article, I’d like to present my thought that the rescue mechanism as it is now could lead to more problems down the road that one day might become an even bigger crisis. 

During 2020 and 2021, the Fed printed $5T to combat a potential economic collapse caused by Covid 19. Some of this newly minted money found its way into Silicon Valley Bank (SVB) deposits. Since the short-term interest rate at that time was essentially at zero, SVB invested a large portion of the money into long-maturity mortgage-backed securities (MBS) that at the time were at least yielding somewhere around 1.6%.

If we look at the SVB Balance Sheet, this investment is classified as Held-to-maturity securities on the asset side (shown in green.) This means if they hold the securities until maturity, they will definitely not lose money. But if they are forced to sell before maturity in a rising rate environment, they will lose money.