Silicon Valley Bank (SVB) shares dropped from $267, on 3/08/23, to $100 the next day. The reason, the bank announced a capital raise and the sale of a large number of securities at a loss. That sparked investors and depositors to flee. The bank’s parent company disclosed that the market value of its held-to-maturity (HTM) bonds was $15.9 billion less than their balance-sheet value as of the end of September 2022. That gap was slightly more than SVB's $15.8 billion of total equity at the time. HTM securities are not required to be recorded at the lower of cost or market, as other assets on the balance sheet are. So, when the Fed raised interest rates sharply over the last year or so, the value of those AA rated securities with longer dated maturities dropped significantly.

The issue arose at SVB due to them buying significant amounts of long-dated treasuries which paid, of course, more interest than the shorter-term ones. To increase their income they bought two, three, and five-year maturity instruments that would have paid off at face value on their maturity date. If there had not been huge outflows of deposits at the bank, SVB would not have had to sell those securities well before maturity and at a loss. Investors were pulling their deposits from SVB because they were not paying enough relative to Treasuries. Depositors also were burning cash and didn’t get new money from their VCs. Additionally, there has been a significant slowdown in the number of companies going public. The number of investors pulling large amounts of funds caused SVB to need more cash on hand, forcing SVB to raise additional capital by selling its investment portfolio. Though the bank invested in high credit quality government securities, the large and quick increase in interest rates caused their AA portfolio to drop in value. So, it was duration risk, not credit quality risk, that caused the $1.8 Billion loss in the portfolio of securities they sold.

Even AA rated and insured securities with 2,3, or 5-year maturities can significantly drop in value if you must sell those securities well before maturity in a drastically rising interest rate environment. Bonds have been in a forty-year bull market as rates have been dropping precipitously throughout that period. That bull market has come to an end.

So now the question is which other banks might face a dramatic outflow of deposits. It is possible that other banks with aggressive lending could have the same problem. Treasury Secretary Janet Yellen said the FDIC was NOT considering providing “blanket insurance” for banking deposits. Now the fear of contagion is a major concern in the markets.

What’s next? Silvergate is gone. So is Signature Bank. Credit Suisse just got taken over by UBS. First Republic Bank got $30 billion in emergency deposits from a consortium of banks, and its troubles are far from over. Its high last month was $147. It is now trading around $12.

Recently, I have found that the Cantor Fitzgerald Insurance Cash Program is attractive for some of my clients. This product is a private label cash program and seeks to provide investors with a competitive yield while maintaining next-day liquidity. It is currently paying 4.19% APY on the first million on deposits (3.69% APY of $1-25 million)¹ and up to $25 million (individual) and $50 million (joint accounts) of FDIC coverage.

For more information on this topic, please contact the team at Fortitude. 

1. as of May 15, 2023.

Rates may be subject to change. A blended rate for balances greater than $1 million will apply. This rate assumes you have deposited funds in a CF Cash account for 12 full months and have kept the interest earned in the account to be reinvested.

This is for informational purposes only and is not an offer to buy/sell an investment. The FICA program is not a security. The views of this material are those solely of the author and do not necessarily represent the views of their affiliates.

CF Cash is designed to satisfy the FDIC’s requirements for agency pass-through deposit insurance coverage. Program banks in the network are FDIC-insured “banks” as defined in the Federal Deposit Insurance Act. The FDIC Limit is $250,000 per depositor per bank.

Balances held in clients’ custody accounts may not receive FDIC insurance. If clients have any cash at any depository institution that is in the network, then they may not receive full FDIC insurance coverage on their deposits at those institutions. Funds may be submitted for placement only after a depositor enters into a deposit agreement for CF Cash. The agreement contains important information and conditions regarding the placement of funds.

Liquidity is ordinarily available on a next business day basis. Same day purchase credit and next day liquidity redemptions are subject to a 3:00 PM ET cut-off. Please carefully read the current Program Terms and Conditions for more complete information and the governing terms of the account (including liquidity, terms, etc.).

There are risks to all financial instruments, and the informational materials provided by Cantor Fitzgerald should be read in their entirety prior to making a deposit. Because clients' situations and objectives vary this information is not intended to indicate suitability for any particular client.

Statements concerning financial market trends are based on current market conditions, which will fluctuate. Past performance or forecasts do not guarantee future results.

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