A Dark Day For Banks

It doesn’t feel like an overstatement that we may be on the precipice of a Big Short 2.0

Follow along with us -?

Today has been a dark day for the banking industry, and it’s only getting worse. While some of the bigger players in the space may come out of this alive, the future of smaller and medium-sized banks remains extremely murky.?

A run on deposits has caused SVB and Silvergate to collapse and puts even more pressure on Credit Suisse which was already in a bad position. Each of the institutions has its own issues, but the common denominator centers around one thing: rising interest rates.

Hikes have prevented these banks from making any sort of profit when they’ve been forced to sell batches of particular assets.?

Before we come to any sort of conclusion about the future, we need to dissect what went wrong for each bank…

Starting with SVB:

Shares of the bank fell 60% on Thursday after SVB announced a plan Wednesday evening to raise more than $2 billion in capital. The stock dropped another 60% in premarket trading Friday before being closed for trading as regulators took control of its assets and the bank officially failed. The bank’s fall is the 2nd largest banking failure in US history…

Why did they need to raise so much capital in the first place??

A massive chunk of SVB’s base is venture capital firms. Tech stock sell-offs and rapidly declining valuations have slowed in-going deposits to SVB. The last thing firms can do is write more checks to the bank.?

So, since SVB wasn't getting many deposits, it had to sell a huge amount of government bonds, roughly $21 billion worth. In most cases, a transaction like this would seem to help steer the ship back in the right direction, but as previously stated, we live in an environment dominated by interest rates, and due to how much they've risen, SVB lost a whopping $1.8 billion on the sale.?

Oh, and that’s not all; Benzinga reported that SVB’s CEO sold $3.57 million of stock within the last 2 weeks.

And just like that, everything can go away…?

Before we move on to Silvergate, a quick look at another crypto-friendly bank that made headlines on Friday, Signature Bank, $SBNY…

Signature Bank's stock dropped as much as 30% in early Friday trading as the fallout from both Silicon Valley Bank and Silvergate spread through the banking industry. The bank's stock has recovered somewhat, but it is still down more than 20% as of this writing.

Now, we move to Silvergate.

Silvergate, one of the two main banks for crypto companies, is also in the process of liquidating its bank. Why? Well, it’s more of the same. Investors became scared of the current market sentiment and rushed to pull funds, especially after a 68% drop in customer deposits at the end of 2022. This caused a $1 billion net loss and forced the bank to sell $5.2 billion worth of debt securities.?

Silvergate is obviously dealing with a unique market sentiment. Yes, rates have impacted everything, but crypto in particular has been destroyed because of the FTX fallout and an industry crackdown by the U.S. government. Every day, people lose faith in the space, which makes investors pull their money out and put it somewhere else.?

And what about Credit Suisse? Could they be next?

As of Friday morning, the stock was down over 2%. The drop is due to the fact that the company's annual report was late because the SEC called to ask about changes made to cash flow statements in 2020 and 2019. What happens there remains to be seen, but the bank has been struggling for quite some time, prompting yet another overhaul of operations. In February, the bank said that it had lost money for the fifth quarter in a row and that it expected more losses in investment banking and wealth management.?

Customers took out $121 billion from the bank in the last three months of 2022 because they thought the company was about to go bankrupt. The bank's reputation has taken a huge hit because of reports of failed compliance initiatives and poor leadership.?

What’s next? Big banks will likely survive this (we hope), but competition for business is about to become the hardest it’s been in decades. What these institutions do to lure in new customers will be a major tell-tale sign for the industry.

As for smaller banks, it’s hard not to be grim about the future. Anything they earn from lending will likely be squashed when they go to sell assets. For the health of the industry, we better pray that more runs don’t happen.?

What do you think—will small banks survive this? How will big banks manage??