![]() ![]() These factors helped create a perfect storm.īut even for banks that dodge the storm, bond losses are a problem. There were at least three data points for SVB that worried depositors: the speed at which the bank’s deposits had grown, the high percentage of uninsured deposits it had, and the magnitude of losses relative to its equity. Clients with high balances at a bank are often skittish about the safety of their funds and more likely to withdraw money fast at signs of trouble. That translated to a high percentage of customers’ deposits being bigger than US deposit insurance limits. For SVB, they spelled trouble in part because its clients tended to keep large balances at the bank as a condition for receiving services like lines of credit. Rising deposits on their own don’t necessarily represent a problem for banks. SVB’s domestic deposits, for instance, rose more than 150% from the end of March 2020 through the end of 2022. All that cash the Fed and the government pushed into the economy quickly found its way into the banking system, giving lenders trillions of dollars to invest. Losses on bonds are a risk whenever rates go up, but banks’ holdings were bigger than usual in 2022. The value of those bonds plunged, because who would want to buy an old bond paying 0.6% interest when new ones were suddenly paying more than 3%? Then inflation surged and the Fed started urgently driving up interest rates. There were some Treasury notes that promised to pay annual interest of just 0.6% over 10 years. ![]() When the pandemic hit, and the Federal Reserve pushed down rates once again by pumping unprecedented amounts of cash into the economy, many banks loaded up on long-term government and mortgage-backed bonds. Read More: Flight to Money Funds Is Adding to the Strains on Small Banks “They’re paying more for deposits, and their earnings on bonds are fixed,” said Stan August, a retired bank examiner for the Federal Reserve Bank of Richmond and a former bond analyst at Bank of America. That in turn could curb their ability to lend to consumers and businesses, slowing the economy. They’re being pressed to pay more for funding while their revenue is limited by the investments they made in low-yielding bonds during the pandemic. This approach can provide a more accurate representation of the investment's historical performance and helps investors to evaluate the investment's consistency over time.And yet as depositors keep gradually withdrawing their money and shifting it into money market funds and other investments, banks are facing a squeeze.
0 Comments
Leave a Reply. |