US banks: battered by hard reality of bond maths

Life can come at you pretty fast. One week ago, Silicon Valley Bank had a market capitalisation of $6bn. Today that figure is essentially zero. US regulators have stepped in with a guarantee for all deposits for SVB as well as Signature Bank, which was closed at the weekend. The latter had a concentrated exposure to technology companies. Much of its deposits were uninsured.

Most banks fail because of poor lending or, in the case of the global financial crisis, owning complex assets that turned out to be largely worthless. But SVB’s sin was holding a portfolio of dull long-dated US municipal or agency bonds whose paper value eroded following sharply tightened US monetary policy.

Banks are mysterious creatures compared with companies in the real economy. Mechanical balance sheet ratios around leverage and equity drive decision-making far more than, say, maximising widget sales. Those esoteric calculations at SVB led management to seek to raise $2bn of capital last week. But abstract maths can turn visceral when customers sense trouble.

The Federal Deposit Insurance Corporation and vulture investors are left in an interesting position. A deposit insurance fund paid for by FDIC member banks, for now, will make all depositors at SVB and Signature banks whole. Regulators will also have the job of selling off the remaining asset book of SVB, which until seven days ago had a net value of nearly $15bn. Bargain hunters should take note. For centuries, fortunes have been made picking through the carcasses of financial institutions.

The Federal Reserve announced on Sunday that other banks could tap a new liquidity facility where their high-quality securities would serve as collateral. SVB and Signature have died so that their rivals can live.

This is a black eye for the US banking sector, which has offered stability and healthy returns for equity investors since the financial crisis.

Shareholders and management will receive little sympathy. But banks have billions in assets as well as thousands of employees and community relationships. The shock unleashed by the cold reality of bond maths cannot be seen as healthy creative destruction.