Banks Lose Billions in Market Value Amidst Sell-Off Triggered by Silicon Valley Bank Woes

On Thursday, the four largest US banks by assets, JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo, saw $52.4bn wiped off their market value. The loss was a result of a widespread sell-off of financial stocks, with investor fears over the value of lenders' bond portfolios cited as a key factor. Analysts linked the sell-off to the difficulties experienced by Silicon Valley Bank, a small technology-focused lender.

  • Late on Wednesday, Silicon Valley Bank disclosed that it had lost approximately $1.8bn following the sale of a portfolio of securities worth $21bn. The sale was in response to a decline in customer deposits, and the losses incurred prompted the bank to announce a share sale to bolster its capital position
  • The steep losses from Silicon Valley Bank's securities sale brought into sharp focus the potential risks that could be lurking in the massive bond portfolios of other US banks
  • During the coronavirus pandemic, many banks invested an influx of deposits into long-dated securities like Treasuries, and the value of those holdings has sharply declined in price over the past year as interest rates have risen quickly

As a result of the sell-off, the KBW Bank index plummeted more than 7%, marking its steepest drop since June 2020. At that time, investors had dumped bank shares due to fears of a financial shock in the early months of the Covid-19 pandemic.

Mood Breaker

While some analysts have described the difficulties at Silicon Valley Bank as not illustrative of a sector-wide problem, the sell-off has had a notable impact on investor sentiment.

  • Wells Fargo analyst Mike Mayo referred to it as the banking industry's "SIVB Moment" in reference to Silicon Valley Bank's ticker on Nasdaq
  • The sell-off occurred just days after data from the Federal Deposit Insurance Corporation, a banking regulator, showed US banks were holding roughly $620bn of combined unrealized losses in their securities portfolios

Deposits Drop

As US banks face rising paper losses in their securities portfolios, savers are looking for higher yields elsewhere amid the Federal Reserve's ongoing interest rate hikes. While the industry's overall equity was valued at $2.2tn by the end of 2022, total realized losses last year amounted to $31bn. These paper losses have been compounded by the declining deposits at banks, which could potentially lead to lenders selling securities at a loss to cover withdrawals, much like what Silicon Valley Bank had to do.

  • As a result, analysts are scrutinizing the bond portfolios of other US banks to assess the extent of their unrealized losses
  • Christopher Whalen of Whalen Global Advisors noted that banks with significant Treasury holdings would be the most affected, as they were unprepared for this continued inflation
  • While Whalen believes that recognizing these losses would not impact most lenders' solvency, market participants are still wary of the possibility of having to sell securities at a loss could which further erode investor confidence in the banking sector

As rates continue to rise, banks are expected to recognize even more significant losses. And with savers seeking higher yields, US banks will need to find ways to offset these losses without sacrificing the trust of their depositors.

Disclaimer

Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products. Please note that the writer of this article is not registered as a financial advisor.

Credits

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