Investors sold off bank stocks Thursday, spooked by fears of a possible industry liquidity crisis after SVB Financial SIVB said Wednesday that it sold most of its $21 billion securities portfolio in which it had unrealized losses.
The crisis prompted the U.S. government to take control of the bank on Friday.
SVB, a major lender to early-stage startup technology and healthcare companies, said it would record an aftertax loss of $1.8 billion in the first quarter of 2023 as a result.
“Aside from crypto-related meltdowns, this is one of the first banks we’ve seen that has really suffered a liquidity crunch, which has forced it to restructure the balance sheet and realize losses on its securities portfolios,” said Eric Compton, equity strategist at Morningstar.
He added: “SVB scores materially worse than any bank we cover on liquidity and unrealized-loss metrics. This makes us think that SVB could be facing a unique liquidity crunch that does not have to feed through the entire system; however, it does highlight that these risks are now more elevated. It also highlights that it can be very difficult to predict how funding pressure can change in any given quarter and when these risks can materialize.”
Which Bank Stocks Were Hit the Hardest by SVB’s Plunge?
SVB’s collapse sent other bank stocks tumbling, with the KBW Nasdaq Bank Index losing 7.7% Thursday. The drop continued on Friday morning, with the index falling an additional 1.3% as of 11 a.m. Eastern time. The index is now down nearly 15.6% in the past month.
Among the worst performers:
First Republic Bank FRC, based in San Francisco, saw its shares plummet 16.5% Thursday and an additional 15.2% Friday morning.
Phoenix-based Western Alliance Bancorp WAL stock lost nearly 13.0% Thursday and an additional 17.1% on Friday morning.
New York-based Signature Bank SBNY stock fell 12.2% Thursday and an additional 8.6% on Friday morning.
Salt Lake City-based Zions Bancorp ZION stock fell 11.4% Thursday and an additional 1.9% on Friday morning.
Dallas-based Comerica CMA dropped 8.0% Thursday and an additional 2.4% on Friday morning.
Pasadena-based East West Bancorp EWCB shares were down more than 8.0% Thursday and an additional 3.7% on Friday morning.
Minneapolis-based U.S. Bancorp USB stock lost 7.0% Thursday, and another 2.2% on Friday morning.
What Happened at SVB?
Compton explains: “Banks bought mortgage-backed securities and Treasuries before interest rates started to rise. As interest rates have risen, the prices of these securities went down. Banks are holding a number of securities which technically have losses on them but as yet are unrealized.
“The securities pose limited credit risk because Treasuries and government-backed MBS carry the explicit or implicit backing of the government. However, if a bank is forced to sell them at a loss, those losses will then flow through the balance sheet and start to erode equity. This presents a liquidity problem, especially if deposits start to leave the banks, which they are. Deposit outflows put more and more pressure on the banks to sell off existing assets. This risk has been lurking beneath the surface but just materialized in a big way for SVB. This is why bank stocks are selling off in response to this news.”
In November 2022, Martin Gruenberg, the chairman of the Federal Deposit Insurance Corporation, flagged mounting unrealized losses in bank securities portfolios as an “overhang” that could soon become “problematic.”
Still, Compton says he doesn’t expect other banks in his coverage area will need to take similar measures to SVB. He explains that while Truist Financial TFC, U.S. Bancorp, and Bank of America BAC have the largest unrealized losses as a percentage of tangible equity, “their liquidity profiles seem much less stressed than SVB.”
SVB’s actions highlight increasing funding pressures in the banking industry that will put pressure on net interest income, Compton says.
“Liquidity issues are an evolving risk worth watching,” he adds.
Correction (March 10, 2023): A previous version of the article showed incorrect data in the “Bank Stocks’ Unrealized Losses and Liquidity Risk” table for the Unrealized Losses/Tangible Equity and Liquidity Risk columns. This has been corrected.
The author or authors do not own shares in any securities mentioned in this article.Find out about Morningstar’s editorial policies.
SVB's stock plummeted by 60% on March 9 after its capital raising announcement. Some people are saying the bank run was Twitter-fueled. California regulators shut the bank down on March 10 and placed SVB under the FDIC. Unlike personal banking, SVB's clients had much larger accounts.
Shareholders will get nothing in a bankruptcy; they're always at the absolute back of the line. The bondholders are in a better position, since debt obligations are still obligations, but they're going to get sheared to some degree as SVB's affairs are sorted out, because there's simply not enough money to go around.
A time when cash resources are in short supply and demand is high. During a liquidity crunch, businesses and consumers are charged high interest rates on loans which are more difficult to obtain. Also known as liquidity crisis and credit crunch.
The collapse of SVB and its reverberations in banking will likely lead to a tightening of lending conditions, resulting in slower economic growth. Low-growth environments tend to be a negative for cyclical stocks and a positive for quality, secular-growth stocks due to the scarcity value of their earnings persistence.
SVB Financial Group (SIVB) shares were halted by officials on the Nasdaq Friday, while its Silicon Valley Bank was shut down by California regulators, following a liquidity crunch that triggered an emergency capital increase and raised concerns for the value of billions in Treasury bonds held in bank portfolios around ...
They got their answer Sunday night: All their funds — even amounts not insured by the FDIC — will be available. “Depositors will have access to all of their money starting Monday, March 13,” the Treasury Department, Federal Reserve and Federal Deposit Insurance Corp. said in a joint statement.
The suit said investors lost more than $24 billion in market value. The filing is the main complaint in a large class-action lawsuit from SVB shareholders, who were wiped out in March 2023, when a rapid bank run led to one of the biggest bank failures in U.S. history.
SVB Financial Group (SIVB) stock is not currently trading. The Federal Deposit Insurance Corporation (FDIC) announced on Friday, March 10, 2023 that the California Department of Financial Protection and Innovation had closed the bank and named the FDIC as receiver.
Looming Liquidity Crunch and Potential Repercussions
As liquidity tightens, banks may become more cautious in lending, making it harder for businesses to access capital for expansion or operations. Consumers may also face tighter lending conditions, impacting everything from mortgages to personal loans.
Taken together, margin compression and increased credit costs will take a bite out of bank earnings in 2023. The headwinds to earnings could prompt some banks that had previously contemplated selling to take the plunge and partner with other institutions.
State regulators closed Republic First Bank in April 2024, marking the first bank failure of the year. Fulton Bank entered into an agreement with the FDIC to purchase most of Republic First's $6 billion in assets and to assume most of its $4 billion in deposit liabilities.
At the root of a liquidity crisis are widespread maturity mismatching among banks and other businesses and a resulting lack of cash and other liquid assets when they are needed. Liquidity crises can be triggered by large, negative economic shocks or by normal cyclical changes in the economy.
Establishing Contingency Funding Plans (CFP): Banks develop Contingency Funding Plans to address potential liquidity shortfalls. These plans outline the strategies and actions to be taken in the event of a liquidity crisis, ensuring a structured and coordinated approach to managing liquidity under adverse conditions.
Since shares in neither SVB nor Signature Bank are still being traded and the institutions no longer exist, the shares are assumed to be worthless. Taxpayers who hold worthless securities are generally allowed to claim a capital loss in the year the asset becomes worthless.
SVB Financial Group, the onetime parent of Silicon Valley Bank, and Signature Bank will be delisted from the Nasdaq, the Nasdaq Stock Market announced on Friday, following the failure of both banks and the trading suspension of their shares last month.
The CEO of Silicon Valley Bank Financial sold $3.6 million in stock two weeks before the California banking giant's epic crash Friday, signaling bank officials might have known the bank was in trouble before it reported a nearly $2 billion loss that led to the biggest bank failure since the Great Recession in 2008.
Nasdaq said the decision to delist the stock followed SVB's bankruptcy filing, concerns over the the “residual equity interest” of holders of existing listed securities and concerns over the company's ability to comply with all listing requirements. SVB said it didn't plan to appeal the Nasdaq's...
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