In recent time US banks are closing in red and some banks are closing in around -60% close in a day and one of the banking index Dow Jones Bank Index has declined around 21% in past 10days. US banks facing a huge falls currently due to various reasons like assets liability mismanagements, Loan to deposit ratios, etc. The recent bank which collapsed was Silicon Valley bank which headquartered in Santa Clara, California, Signature bank also collapsed which headquartered in New York city, New York.
(Source: investing.com)
Silicon Valley Bank (SIVB):
The bank was founded in 1983 and has a track record of around 40 years collapsed because of having huge weightage of around 43% in Held-To-Maturities (HTM) securities to its total assets in its balance sheet. Whereas its total deposit including demand deposit is around 88.5% to its total liabilities in it balance sheets.
(Source: SIVB Annual report 2022)
On March 10, 2023 US FED intervene due to collapse of SIVB and closed due to fall of around 60% in its share value in a single day. The deposits of the SIVB are insured by Federal Deposit Insurance Corporation (FDIC). FDIC is an independent agency created by US Congress to maintain stability and public confidence in the nation’s financial system. It insures deposits at banks and savings associations, which protects deposits up to $250,000(per person, bank, and account type). That means even if bank implodes, depositor won't lose the FDIC-insured money kept there.
Findings:
In the balance sheet of the value of HTM securities investments are increasing drastically from 2018 Q1 of 10,01,545.36 to 27,96,581.82 in 2022 Q4. (Values are in USD, millions)
(Source: BLOOMBERG)
The chart clearly tells how increase in HTM securities by the US banks. There is nothing wrong if HTM investment increases unless it happens like SIVB.
Recently JPMAM has researched of US bank in which most of the bank’s Loan to Deposit ratios are not good according to current economic situation. Of which SIVB stood more risky followed by Signature Bank (SBNY) and many other US banks.
(Source: JPMAM. Securities include Hold to Maturity and Available for Sale categories. Q3 2022)
Reasons:
Why there is increase in HTM and increase of deposits than loan in the balance sheet of US banks. It is mainly because of:
US printed more USD and injected liquidity in the economy during COVID19 to boost the economy.
Due to more money circulation there is boom in IT and all other sectors. The rise in IT sectors made huge deposits in the SVIB bank which lends to most tech startups. When inflation started rising FED started raising its rate drastically. Currently US inflation is around 6.04% and FED rate is 4.75% as of February 2023. Whereas 2% is the inflation target of US Federal Reserve.
The 10year bond of US which gave a yield of 0.5 to 0.6% in the year 2020 is currently giving yield of around 3.4% in 2023.
Conclusion:
Now after the fall of SIVB and SBNY US Federal Reserve is in critical stage whether to raise rate to control inflation or if it rises rates then as discussed above it will be worse for many US banks.
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