SVB is a crash waiting to happen. One indicator is the growing reliance on debt (as opposed to deposits) acquired in capital markets.
from wall street journal:
SVB’s year-end balance sheet also shows $91.3 billion in securities classified as “held to maturity.” The label allows SVB to exclude book losses on these holdings from its earnings and equity.
SVB said in a footnote to its latest financial statements that the fair market value of the held-to-maturity securities was $76.2 billion, $15.1 billion less than its balance sheet value. The gap in fair value at year-end was almost as large as SVB’s total equity capital of $16.3 billion.
Here is the asset image from Bloomberg:
source: Bloomberg, March 10, 2023.
It’s kind of funny to think of the credit risk associated with US Treasuries, but if the price changes significantly, there could be a capital loss (as opposed to a loss from a default), as was the case with US Treasuries after QT and the Fed’s funding rate hike.
Thus, SVB experienced a typical bank run when faced with solvency problems, given that deposits exceeded the insured amount. On the eve of the crisis, the bank increased its reliance on debt acquired in the capital markets (as opposed to deposits that required higher interest rates). In this sense, taking on more debt should be seen as a signal rather than a causal factor.
figure 1: End-of-quarter debt as a percentage of total minority net debt, % (blue, left axis) and 10-month three-month treasury spread, % (tan, right axis). source: Yahoo FinanceTreasury via FRED, and author’s calculations.
