We entered last week with the initial demise of Silvergate Capital (NYQ:SI) which subsequently led to the second largest US bank failure of all time in the Californian Silicon Valley Bank (SVB).
We now know that SVB’s investments were too heavily weighted towards long-term bond style assets, which is in contrast to the immediate liquidity needs of the majority of their client base who are mainly IT start-ups and tech stocks who have regular short-term liquidity requirements.
With the nervousness around Silvergate, SVB had a run on deposits which saw them have to draw down on these long dated assets, realising significant losses because these assets were purchased when interest rates were at their lowest. FYI when there is an interest rate increase, the value of pre-existing bonds drops, because the new ones have higher rates of interest. This shortfall caused by the selldown saw them approach investors cap in hand for US$2.5billion to sure up the balance sheet. Not a great look for a Bank and unfortunately saw a much larger US$42B run on deposits that ultimately, as we mentioned last week, saw the regulators come in on the Friday to shut it down.
But the dominoes then started to tumble from there… at the time of writing last week’s Momentum Monday report (Sunday US time) we started to receive word that the third largest US Bank failure on record was playing out at the New York based Signature Bank.
The growing nervousness saw the Federal Reserve launched a new “Bank Term Lending Program” which allows a range of banks and other eligible firms to borrow against Treasuries, mortgage back securities and other eligible collateral at face value, That last point is very important because in the past any liquidity support was provided at current values, But it was still not enough to allay the fear in US Banks. More on that in a moment.
By the new week the contagion had spread across the Atlantic with scandal struck Credit Suisse needing to borrow an eye watering $81B from the Swiss Central Bank to ensure immediate liquidity. Part of the fear was attributed to the bank's previous history, and part because Saudi National Bank Chairman Ammar Al Khudairy said that the bank has ruled out further investments in Credit Suisse. The reason why (not often published) was because they…
