SVB Reprieve: Hail Powell the Merciful
The Fed, US Treasury and the FDIC step up to stabilize what could have been an underestimated spiralling effect.
“Am I not merciful?!?!”
The weekend drama ended with relief, but the risks in the bank system do not eliminate the risk for parent company securities.
The Fed will make funds available for SVB depositors while the bondholders and stockholders are on their own.
SVB still has a problem around what the going concern operation might look like, who might own it, and who will be able to address the massive unfunded commitments to its customer base.
After a few days of getting mired in the scenarios coming out of the “run” on Silicon Valley Bank, the immediate crisis for depositors has been taken care of even if there are many issues that remain in play, including the fate of the consolidated entity and its ability to stay out of Chapter 11 or find a buyer. The SVB “event” was an issue that carried a lot more risk than some were saying, including more than a few market brand names who are not as familiar with the mechanics of the credit markets as they might pretend to be.
If there was any question around whether a potentially contagious bucket of risk aversion would have had wide ramifications for the bank sector, the actions taken by the Fed answer that question. It was a big deal. We even saw the CNBC brand name talking heads at the studios and on the job with guest star Gary Cohn on a night when some pre-programmed filler is usually on the channel. The weekend also saw Signature Bank on the list of banks closed by the recent market action.
The main events are as follows:
SVB gets liquidity to cover depositors: The joint statement released by the Fed (Powell), US Treasury (Yellen), and FDIC (Gruenberg) made a systemic risk exception to provide liquidity to SVB and Signature Bank. We discussed the risks of SVB and how it could radiate out in a separate commentary. This buys time to find a buyer but details on the loan book and the rights of various parties will need some clarification under the regulators control.
No taxpayer risk and it is not a bailout of bonds or stocks: The joint release was clear that there will be no losses “borne by the taxpayer” and that “shareholders and certain unsecured bondholders will not be protected.” We have a hard time seeing how SVB bondholders can avoid the fate of Chapter 11. That will take a lot more good news. The political talking heads already see an opening on the left and right and use the term bailout. Facts have little to do with anything said out loud in Washington these days.
The actions with SVB and term loan program is a side order compared to what happened in the COVID crisis and a bread crumb compared to the credit crisis. There will be no losses and the advances are covered by collateral (even if par) since the regulators can just hold it to maturity. We suspect the regulators would like to see the holding company interests served up on a plate to mitigate the political risk.
New “Bank Term Funding Program” is announced: In another confirmation of the scale of the problem that exists in the market tied to unrealized losses from securities and shrinking confidence in bank safety, the fed announced a collateralized term funding program. The funding is up to par value on eligible collateral (see Silicon Valley Bank: Depositor Frames of Reference 3-12-23). That “par value” angle is pretty important in stepping around the serious market value problem seen in the securities portfolios (e.g., over $15 bn unrealized losses just in SVB’s Held to Maturity portfolio at year end). The depositors invest at par, so this approach to collateral will not reduce access to liquidity in the event of a sharp market selloff such as those seen in 2022. That should ease risk aversion and bank system confidence problems. That is an important signal to the depositor base that could reduce the hot money flight that sent SVB to an ignominious ending to its storied history in tech-land. The story at SVB just got “too big, too quick” (see Silicon Valley Bank: How did the UST Curve React? 3-11-23) as they made a total mess of their asset liability management. People are still trying to measure their incompetence with a giant dipstick.
For now, SVB looks like a Federal credit line without a business plan: The ability to run a bank and nonbank business for the SVB operation and affiliates is not solved by this action. We are unclear on how SVB can deal with any other aspect of its business even if it can get depositors access to their cash. What this means for existing credit lines drawn and/or unfunded commitments is not clear yet. At year end, SVB had $59 bn in unfunded loan commitments and $3.6 bn in standby letters of credit. That is a lot of credit contraction if they are just a drifting barge waiting to see if there is a buyer. No statement was made yet around the core operations. The good news is that the loan quality will not plunge as their borrowers lose access to their cash. That will at least prop up the valuation of the loan operation assets for potential buyers.
There will be a lot of questions to be answered and events to play out from here.