What happened
Shares of banks and fintechs were broadly getting pummeled on Thursday. Large-cap money center bank Bank of America (BAC 3.35%) was down a whopping 6.2%, up-and-coming digital bank SoFi Technologies (SOFI -0.28%) was down 5.9%, and fintech loan platform Upstart Holdings (UPST -1.97%) was down 8%, respectively.
It is strange to see such a broad cross section of the financial world down so much, which is unsettling. There may be two factors at play here, each resulting in the same risk to banks or bank-adjacent companies. First, SVB Financial Group (SIVB.Q -1.96%) plunged 60%, after it announced it was raising new capital amid deposit outflows. Second, investors may be nervous about tomorrow's jobs report and next week's inflation data, which could spur the Fed to raise short-term interest rates even higher.
Both would have compounding bad effects on banks more broadly.
So what
SVB, known as Silicon Valley Bank, announced today that it would have to sell some of its fixed income securities at a huge loss, and that it was also looking to raise $2.25 billion in more capital through equity, private placement, and preferred stock.
SVB, as its name connotes, caters to a lot of Silicon Valley tech companies and start-ups. That sector has been feeling the heat from the Federal Reserve's interest rate increases and a post-pandemic slowdown. Thus, those companies are likely drawing down their cash deposits. In addition, SVB's consumer division may also be seeing deposits dwindle as layoffs hit the tech world, and consumers draw down their pandemic savings.
Banks typically "borrow" short-term with low-cost deposits and lend at higher rates, earning a spread. However, if deposits flow out of a bank, that means the bank will need to sell its assets to cover the outflow. Unfortunately, SVB was forced to sell longer-duration Treasury and agency securities at a huge loss, as higher interest rates have caused the value of longer-duration fixed income securities issued prior to last year to fall a lot.
The fear across the banking sector today apparently stems from this incident, even if the bank stock in question doesn't really resemble SVB in many ways.
While other banks may not be seeing their deposit base leave in droves as SVB is experiencing, they could see some deposit drawdowns. Even if the numbers aren't that large, banks may begin to compete in a more cutthroat manner for customer deposits, offering to pay out higher rates.
Meanwhile, all of that would be exacerbated if the Federal Reserve hikes interest rates more than expected. The blowout January jobs figure caused a big reset in terms of expectations for the path of Federal Reserve interest rate increases, and higher short-term rates generally mean banks may have to compete more fiercely for depositors against alternatives such as CDs and short-term Treasuries.
So with the February jobs report coming out tomorrow and inflation data out next week, that's just adding fuel to the anxieties over SVB's situation.
Bank of America is a large bank that generally has some of the lowest deposit rates in the country, thanks to its national footprint. However, if it has to compete more for deposits, that could cause a big rate of change to its funding costs, even if its costs are still generally lower. That's why it's seeing such a big move today.
SoFi just received a banking license this year, and has sported some of the highest deposit rates out there in a bid to attract depositors for the first time. However, since Sofi's rates were already high, the rate of change may be lower, and therefore this may be why this more volatile name may be down less than the "safer" Bank of America.
Meanwhile, Upstart doesn't hold deposits and is not a bank, but it has to resell its loans to bank partners. So, if the cost of capital for banks goes up, that would limit Upstart's ability to originate loans. That's already been the case since early last year, and Upstart's problems could only be exacerbated more by this short-term rate turmoil as well.
Now what
Investors have been wondering if the Federal Reserve's rapid rate increases might cause financial markets risk at some point, but they hadn't really seen that, even a year after the Fed began its rate-hiking campaign, with the well-known exception of FTX and the cryptocurrency market. However, SVB's move today may be setting off fears that some contagion could start to make its way into the broader banking system.
While most banks are in very different positions than SVB, investors should probably monitor any financial or bank stock they own closely, and be especially attuned to their bank stocks' capital and liability position.
