The biggest bank collapse since the Financial Crisis just happened as Federal regulators are managing an emergency breakup of SVB Financial Group, the 16th largest bank in the USA before its failure. SVB was the largest bank by deposits in Santa Clara, CA (Silicon Valley). This bank dealt with a range of premium wine businesses, venture capital and private equity firms, healthcare and life science companies, and both tech businesses and wealthy individuals. It had $175 billion in deposits and $209 billion in total assets at the end of 2022. The SVC bank collapse fallout may include Silicon Valley tech companies that cannot meet payroll or cover expenses and other banks with which it did business.
Banks take deposits but then put the money to work with loans and mortgages. Their profit generally increases as interest rates go up. In the case of SVB more than half of its loans at the end of 2022 were to private equity and venture capital firms. These loans are secured by limited partner commitments and then invested in private businesses. A seventh of SVB’s loans were to wealthy individuals, a fourth to tech and healthcare companies, and a tenth to growth stage startups. A substantial part of SVB assets were in US Treasuries issued prior to recent rate increases making them less valuable when they needed to be sold to raise cash.
Run on SVB Bank
Part of the issue with SVB was that many of its depositors were tech startups that were rapidly drawing down their balances as they funded their businesses. Because funds could be withdrawn at a faster pace than SVB could redeem bonds or collect on loans and because the bank was taking a loss of older Treasuries their financial situation became precarious. When that became known, everyone who could, withdrew their money, and the ones who did not withdraw in time were left holding the bag. While the FDIC insures deposits up to $250,000 on every single account at insured banks, the vast majority of folks banking at SVB had much more than that on deposit.
Redeeming Assets from SVB
Everyone who has insured deposits up to the $250,000 limit per account will be paid within days. Because SVB was not totally out of money, many will receive between thirty and fifty percent of their assets allowing many businesses to keep operating in the short term. As the FDIC works through the process of paying depositors, banking stocks took a hit across the board even though folks like Bank of America, JPMorgan Chase, and Wells Fargo are in no eminent risk of failure.
Trading the Banking News
Although regional banks that had business interests with SVB could be in trouble there is no evidence of risk to the larger banking sector. Nevertheless, the market can get spooked and dip or rise based on the most recent news. This is an example of how options traders need to follow technical indicators as well as fundamentals when trading at such times. We saw how during the initial phase of the Covid crash how wishful thinking as well as central bank intervention distorted the market and only by understanding how truly bad the fallout would be could we recognize the options trading potential in the falling market. At this time there may be a fair amount of fear and panic that does not really have a solid reason. This is also one of the good reasons not to trade alone in uncertain markets but rather work with one of the trading squadrons at Top Gun Options where we potentially print money in all markets.