Hi Friend,
It has been an interesting month! Last week I was speaking at the 2020 Innovation Conference in Birmingham. Over 200 in the hall. The event was organized by the 2020 Group. The 2020 Group provides innovative training and marketing solutions for progressive accountants and tax professionals worldwide. The room was predominantly dominated by accountants and financial services providers.
Earlier in the month we were working with Begbies Traynor, We Do Trade and Kingsley Asset Finance in Haydock. We started the year with a Manchester event in the offices of Praetura Group Financial Services. It's great to be doing live events once again. The feedback and audience response is a great boost to any presentation.
An update on UK and world economics the principal theme of the presentation. Over one hundred slides in the deck. The focus on interest rates was of great interest. The disruption to financial markets and the banking sector was brought into focus by the collapse of Silicon Valley Bank.
Silicon Valley Bank : The Bank From Planet ZIRP ...
A lot of interest in the demise of SVB. The rise in interest rates and the collapse of bond prices had already created problems for pension funds with LDI exposure in the U.K. Rate hikes by the Fed and the rise in bond yields created fatal challenges to the balance sheet of SVB in the U.S.A. There have been many warnings about the problems to follow the eventual "Escape From Planet ZIRP". Bonds not gilt edged but razor edged. They really are the peaky blinders of investment.
In June 2013 Andy Haldane Chief economist at the Bank of England warned : “Let’s be clear, we have intentionally blown the biggest government bond bubble in history”. Andy Haldane was then the director of financial responsibility at the Bank of England.
In November 2015 we wrote "Over the medium term, we expect bond yields (after Fisher) to reflect a hedge against inflation plus a real risk return. Hence we consider the normalized yield on ten year gilts to be between 4% to 4.5% if the plausible inflation target is 2%. There is a real risk of capital collapse as bond yields rise and capital prices fall as yields return to normalized values." Warnings From Planet ZIRP November 2015 This week the Bank of England issued a warning to pension funds with LDI exposures. Beware of rising rates! So what of SVB.
The SVB Balance Sheet Too Heavy for the Flight ...
Designed in the low interest world of Planet ZIRP, with a balance sheet too heavy for the flight, SVB was ill equipped for the transition. Deposits had increased from $49 billion dollars in 2018, to $189 billion dollars by 2021. "Hot money" of course, two thirds of the deposits were non interest bearing demand deposits. Over 90% were above $250,000 and not insured under FDIC rules. In 2022 deposits fell by $16 billion as investors were lured away by the prospect of higher yields. It was a harbinger of problems to follow for the bank in 2023.
Much attention has been focused on the asset disposition on the balance sheet. Assets under management increased from $57 billion in 2018 to $212 billion by the end of 2022. In 2022 $14 billion dollars was held in cash. $26 billion was held as Assets for Sale including $16 billion of U.S. Treasuries. Assets For Sale were marked to market with a $2.5 billion impairment.
The Net Asset Value or Total Equity in the bank was $16 billion. Unchanged from the year before, the balance sheet had absorbed the hit from deposit withdrawals and the asset write down.
More ominous was the position on Assets Held to Maturity (HTM). Over $90 billion by the end of 2022, 90% of the assets were held in the alphabet soup of mortgage debt. MBS, CMOs and CMBS. [Mortgage Backed Securities, Collateralized Mortgage Obligations and Colllateralized Mortgaged Backed Securities]. Illiquid and vulnerable to rising rates, echoes of 2008 would create concerns for some. The balance sheet note of a $15 billion loss should the HTM assets be marked to market, extinguishing Total Equity, would cause depositors to head for the exit.
The SVB 10k Annual Return was filed on the 24th February ... The SVB 10k Annual Return was filed on the 24th February. At the beginning of March, Moody's reportedly informed SVB Financial, the bank's holding company, it was facing a potential downgrade of its credit rating because of the unrealized losses.
On March 8, 2023, SVB announced it had sold over $21 billion of investments, borrowed $15 billion, and would hold an emergency sale of its stock to raise an additional $2.25 billion. Investors were reluctant. The markets were unconvinced. By the close of business on March 9th, customers had
withdrawn $42 billion dollars. A further $100 billion was up for withdrawal the
following day. The Bank had run out of cash and options.
SVB was placed into the FDIC receivership. The
Bank of Planet ZIRP could no longer escape. Perhaps It was
never designed to make it to the higher rate environment.
Our Latest Case Study : Silicon Valley Bank : The Bank from Planet ZIRP ...
That's all for now, have a great weekend ahead,
John
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