Unlike Lehman Brothers, the failed Silicon Valley Bank held billions of dollars in high-quality mortgage and Treasury securities that regulators encourage banks to own as a buffer from potential losses in the post-2008 era. Here’s what went wrong.
Silicon Valley Bank’s collapse last Friday has exposed a big problem with “safe” securities bought with government guarantees during the pandemic.
SVB Financial SIVB, -60.41% a week ago disclosed a sudden sale of about $21 billion of high-quality, rate-sensitive mortgage and Treasury securities at a $1.8 billion loss, which caused customers to flee with their deposits and ultimately led to the bank’s failure on Friday. The new Fed facility provides up to $25 billion in credit protection to banks that use it, which is set to run through at least March 11, 2024.
This chart shows the downward spiral of the value of investment securities held at U.S. banks since the Fed started lifting rates from near zero last March, with an estimated $620 billions in unrealized losses piling up at the end of 2022. A lingering question after the collapse of Silicon Valley Bank is why it and other midsize banks had not safeguarded their portfolios against the Fed’s reversal of its easy-money stance, Mitchener said.
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