The situation that caused Silicon Valley Bank (SVB) to collapse in the course of 48 hours was uncommon and it’s an example of the type of consequences that can happen after interest rates rise quickly, according to an analyst at RBC Capital Markets.
In an interview on Tuesday, Gerard Cassidy, managing director and head of U.S. bank equity strategy at RBC Capital Markets, said the key here is that “they were long duration on assets, funding it with short duration funding.”
He added that it’s “not a good mix in a rising rate environment, they got caught.”
“This reminds me of 1994 when you saw Orange County, California go bankrupt in the same environment, Mexico had the peso crisis, Kidder, Peabody & Company went under; and so we've had periods of time when rates move rapidly as they did in '94 under [U.S. Federal Reserve] Chairman [Alan] Greenspan,” Cassidy said.
“You're going to have consequences [when rates rise quickly] and I was surprised the consequences took so long to it, but boy did it hit on Friday.”
Last week, SVB became the largest U.S. lender to fail in a decade, after an unsuccessful attempt to raise capital and a mass cash exodus from technology start-ups. Regulators took possession of the bank and it was put into receivership under the Federal Deposit Insurance Corp.
'CALM THE WATERS'
Shares of U.S. regional bank stocks are rebounding in trading on Tuesday after coming under pressure during the Monday trading session. First Republic Bank is one of the regional banks benefiting from a rebound, with shares sharply higher after plunging around 62 per cent on Monday.
Cassidy said he thinks U.S. authorities’ move to create a new backstop for banks, which U.S. Federal Reserve officials said was big enough to guarantee the nation’s deposits, helped calm investors’ worries.
“I think Sunday night when they [U.S. officials] came out with the program to ensure all depositors at the two banks that had failed, Silicon Valley [Bank] on Friday and Signature Bank of New York on Sunday, that was an implicit guarantee to all depositors in the U.S. banking system that if your bank was into the same situation as those two banks, your deposits are guaranteed,” he explained.
He added that it “really did calm the waters,” with U.S. regional bank stocks recovering today after heightened volatility on Monday.
However, Cassidy noted that he doesn’t think this new backstop will be indefinite.
“It's interesting because you might recall during the financial crisis, they used many tools like the ones you saw issued Sunday night to calm the waters to create financial stability,” he said.
“So I think what you're going to find is that this is temporary, it’s not indefinite in terms of the guarantee on deposits, but you're right, I think it should be reassuring to any depositor over US$250,000 that they will be taken care of in a time of crisis.”
'NOT NORMAL'
While U.S. regional banks SVB and Signature Bank failed days apart, Cassidy reassured that this “was very unusual” and “they were both outliers.”
“The two numbers that we focused in on, are the losses as a percentage of their securities portfolio relative to capital, graphed against let's say their level of deposits that were uninsured, meaning they were the large deposits, and these two banks were way off the chart compared to all the other banks,” he said.
“So their [SVB and Signature Bank] business strategy of having 50 per cent of their assets in securities, and of that amount, in the Silicon Valley's case over 40 per cent long-term bonds, that is not normal and that was very unusual, and unfortunately it's costing very dearly.”
Cassidy added his team spoke to a number of regional banks on Monday and “none of them indicated that they were having any issues with deposits.”
“I think outside of the Silicone Valley area and Metro New York, the rest of the country was business as usual yesterday and I think that was a really good sign,” he said.
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