I’m traveling, so apologies for the approximate figures used here. You can double check for yourselves.
Here’s some quick math
– As per the last 10K filing, SVB has ~zero equity with bonds at market prices.
– If all depositors leave tomorrow, SVB will pay their ~200bn in depositors by borrowing from the Fed against their bonds which are worth ~180bn.
– The zombie SVB would pay interest on the Fed loan which will exceed the coupon payments on their debt. Since the Fed loan is at OIS plus 15, if rates stay high, the bank will slowly lose the $20bn and realize the mark to market loss over time.
– The $25bn in guarantees available in the Fed program aren’t enough to protect the system.
– None of this means that a panic will happen, only that it could. It also means the ball is in the court for the Republican congress. They can ask the regulators tough questions and it won’t be pretty.
– Republicans may see this regulatory failure as political gold. They rolled back Dodd Frank for this sized bank, but still had multiple regulators, like the San Francisco Fed. Republicans will push the point, how did you miss this? And if too big to fail is what you wanted to stop, look where all the deposits are moving…. To the biggest banks.
– We have no political bent, but predict that if the Republicans grab onto this it can turn into a very big deal for the markets.
– As we pointed out at the end of last year, bank deposit rates were way off market. It was something to worry about because it increased the risk of deposit flight and a huge increase in funding cost. Now it’s here.
