Don't take my word for it, in the report above, less than an hour old as I share this, CNBC reporters call this a "bank run," and also say Silicon Valley Bank is "the backbone" of Silicon Valley high tech start-up financing. The bank's stock was down over 60% during today's trading session, and has dropped another 21+% since the close. Multiple reports speak of venture capital firms telling their start-ups to pull their funds out of the bank, just in case. This is unfolding overnight, going into Friday (March10, 2023).
Blogger's note- Friday, March 10- It's now the next morning. Trading has been halted on Silicon Valley Bank, whose stock dropped from 267.90 on Wednesday, to around $39 a share overnight. After a very traditional run on the bank happened over the last few days, and in the latest report, Silicon Valley Bank has been closed. The FDIC will pay insured depositors in the next week, and will sell assets of the bank to pay back uninsured depositors in time, according to this CNBC report. March 10, (10:17 am when I'm posting).
This follows the closing and wind down of Silvergate bank, on Thursday, March 9, which is now best known for being a very crypto-friendly bank, and one that had exposure to FTX before its collapse.
"Canary in the coal mine"- For any of you who don't know, that phrase comes from coal miners taking a canary, in a cage, into coal mines in the 1800's and 1900's. Because mines can become filled with toxic gases, fatal to both humans and birds, if the canary died, that meant gases were building up, and the miners had to get out. That's what they did before toxic gas detection meters existed. When something happens that may have further repercussions, it's often referred to as a "canary in the coal mine."
This Forbes article explains that while Silvergate and Silicon Valley Bank had very different reasons for getting into trouble, there is a common theme, and that theme most likely affects many other banks. Over the last couple of years, banks had to invest in bonds that had historically low yields, because interest rates were so low. So banks of all kinds bought U.S. government bonds, or other bonds that paid back 1% or slightly more per year. Since then, inflation rose, and as we all know, The Fed raised interest rates. Now those billions of dollars of 1% or 1.5% bonds are worth much less. But the banks haven't written down those losses. If the banks have no issues, and business goes along normally, they will hold those bonds until they mature, take a loss, and then buy bonds that now yield a 4% or more return.
But, if the bank has a crisis, and has to sell those bonds before maturity, they may take a much bigger loss, perhaps 20% off the value of those bonds. Writing off an extra 20% loss, on tens of millions or billions of dolars in bonds, is a big hit to a bank's balance sheet. Even for Silvergate, it's believed the bond losses, and MBS (Mortgage Backed Securities) losses, not the exposure to crypto, is what really hurt the bank's botom line and made them more vulnerable to other problems.
Because virtually all banks bought really low yielding bonds over the past couple of years, this issue could also affect other banks. Time will tell which ones, and how much of an issue this may be.
There's going to be huge amounts of money moved this weekend, as all kinds of investors try to figure out how safe their own banks are, and trying to find safer places for their money. Next Monday, March 13, 2023, will be interesting.
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