SVB Discussion Flashcards
Explain the factors and risks surrounding SVB.
Main factors:
* Interest rate risk: Fixed income securities
* Liquidity risk: Unsecured deposits
* Relaxing regulation for mid-sized banks
Other factors:
* Concentrated customer base, run in social media, mismanagement etc.
Credit risk not a big factor
What happened during the pandemic?
Balance sheet expansion in the pandemic
* … in tech companies
* Deposits and assets …
- ….
- $91 billion in fixed-rate mortgage bonds ….
- Interest rate risk
Loose monetary policy and boom in investment
tripled between 2019 and 2022
just in 2021, deposits almost doubled
Increase investments in highly-rated bonds
with very long maturities
Assets: HTM vs AFS
Held-to-maturity (HTM):
…
Assets for sale (AFS):
…
End of 2022: $91.3 billion HTM with …
Interest rate risk and…
- To be held until maturity
- Can be carried at nominal par value
- Marked to market
very long maturities, $26.1 billion in AFS
unrealized losses in HTM securities
Liabilities: Unsecured deposits
* Mostly…
* Large deposits from startups
* …
* Deposit insurance in Turkey?
* More than 90% of deposits are uninsured
* Funding liquidity and …
financed with deposits
Deposit insurance: In the US deposits are insured by FDIC up to $250.000
run risk
Inflation and …
* Ultra…, more so during the pandemic
* Inflation reaching levels that have not been seen in 40 years
* Federal Reserve began to increase rates on March 17, 2022
* … 5.25%-5.50% on July 26, 2023
* High rates …
* …
switch to tight monetary policy
loose monetary policy during the GFC
Fed funds rate reaching
decrease the value of fixed income securities
Interest rate risk
Tight monetary policy and losses
* Fed funds rate reaching 5.25%-5.50% on July 26, 2023
* High rates…
* SVB had a …
* Vulnerabilities associated with …
* By the end of 2022, SVB had …of $15 billion in its HTM securities portfolio.
* …
decrease the value of fixed income securities
big portfolio of fixed income securities
duration risk for fixed-rate assets
mark-to-market accounting unrealized losses
Unrealized losses close to its equity
Term structure of interest rates
Typically, …
Deposits have lower returns because of …
Banks make …
longer maturities have higher yields
payment and storage services
profits by taking on duration risk
(what does diagram on slide 15/17 mean?)
Tight monetary policy and losses
* SVB had a ..
* Vulnerabilities associated with …
* By the end of 2022, SVB had … accounting unrealized losses of $15 billion in its HTM securities portfolio.
* …
big portfolio of fixed income securities
duration risk for fixed-rate assets
mark-to-market
Unrealized losses close to its equity
Liquidity risk
Mostly …
Mostly …
More than 90% of deposits are uninsured
…
financed with deposits
large deposits
Depositor run and funding liquidity risk
Liquidity risk: Regulation
* Basel III has set rules for liquidity regulation
* Liquidity coverage ratio (LCR): …
* Due to the easing of regulation in 2018, …
* Some calculations show that SVB would have satisfied the LCR requirement.
Banks need to hold high quality liquid assets to cover 30 days of withdrawals
SVB was not subject to LCR.
