Silicon Valley Bank (NASDAQ: SIVB) is down 60% in 24 hours - this is not a vote of confidence in a banking institution. The issue is both losses on the investment and loan books and a near disappearance of the necessary regulatory capital. That, in turn, could lead to the real problem, a loss of the deposit base. Yes, we do indeed have deposit insurance here but that's not applicable to large parts of that set of deposits.
Bank runs are difficult things to deal with simply because banking in and of itself is something of a confidence trick. Everyone can have their money back, sure, as long as they don't all ask for it at the same time. The banking scene in “It's a Wonderful Life” is all the education we need in that.
Silicon Valley Bank stock price from NASDAQThis fragility is simply inherent in fractional reserve banking. The bank borrows short term (our deposits into the bank are borrowings by the bank) and lends out longer term. This gives a maturity mismatch. That mismatch is maturity transformation which is the very purpose of having banking in the first place - that conversion of short term savings desires into longer term invetment funding. That's not just what the system does, it's what it is for.
The specific problem at SIVB is that their investment book has turned out not to their advantage. Both their equity positions and the loan book were underwater. This was solved by selling out of the positions, crystalising the losses. Further, a massive capital raise to plug the balance sheet. OK, that's what needed to be done and there we are.
However, that then still leaves the possibility of a run. The usual cure for a run is deposit insurance, which the US does indeed have. But such deposit insurance only holds for accounts up to a certain value ($250k in the US we believe). And if the bank's deposit base is largely from corporate entities then average deposit balances are going to be rather larger than that. Which means that the larger depositors are uncovered.
Maybe the capital raise will cover any worries that depositors might have. Maybe it won't - but it's exactly to assuage such worries that the losses have been crystalised and capital raised.
It's very tempting on seeing such a disaster to think that there must be a bounce. There might well be too. But any trading position has to be based on the idea that not only are there no more problems at Silicon Valley Bank but also that SIVB is not going to fall prey to that known banking risk - a wholesale bank run.
Without deeper knowledge any position here is a gamble, not an investment.
