The nation's banking industry got rattled last month. SVB Financial Group's (SIVB.Q 100.00%) Silicon Valley Bank effectively became insolvent, raising questions of whether other U.S. banks faced liquidity risks of their own.
With updated quarterly numbers from three of the nation's biggest banks now in hand, however, it's reasonable to say that SVB's meltdown was somewhat unique and that other banks are going to be fine.
Where SVB went wrong
To understand the nature of SVB's mistake, let's start with some banking 101: The vast majority of customers' deposits in checking accounts and savings accounts aren't held in a bank's safe. The bulk of those funds is actually put to work by the underlying bank, either in the form of interest-bearing loans to other customers, or invested in interest-bearing assets like bonds. A bank simply needs to ensure it has enough liquidity to fund customers' plausible withdrawals on any given day (although the Federal Reserve ultimately regulates the amount of cash required to be on hand).
This is where Silicon Valley Bank went wrong. It bought too many higher-yielding held-to-maturity (HTM) assets that were meant to be -- as their classification suggests -- held until they mature; this maturity could be as much 30 years into the future. The over-commitment to the wrong long-term assets subsequently prevented the bank from buying enough shorter-term, available-for-sale (AFS) bonds and debt instruments that (if necessary) could have been sold to fund customer withdrawals. Less than one-fourth of SVB's securities backing customer deposits were of the available-for-sale variety, in fact. Aggravating the misstep was the purchase of fixed-income instruments that proved overly sensitive to rate hikes. Remember, bond values go down when interest rates go up.
It was this unhealthy mix of assets that would eventually deal the death blow.
The graphic below tells the tale. SVB's asset base was losing measurable value during 2022. But, between the end of last year and early March of this year it really lost value, particularly its important available-for-sale assets. These AFS securities alone were worth around $26.1 billion as of December (as shown on the chart), but they were sold for only $21 billion in March. And yet, it still wasn't enough to provide all the liquidity SVB needed at the time.
Data source: SVB Financial Group. Chart by author.
Investors may never get a final quarterly accounting for Silicon Valley Bank's balance sheet now that First Citizens has taken over. If they did though, it's a good bet it would be ugly.
Other banks are not in the same sort of trouble after all
The collapse of SVB understandably sent shockwaves through the entire banking business. After all, if Silicon Valley Bank is insolvent, other banks could be in a similar degree of trouble. It just wouldn't be clear how close the rest of the business is to illiquidity until it releases the first quarter's updated balance sheets.
As it turns out, at least most of the country's biggest banks are OK.
Take Citigroup (C 2.10%) as an example. Although its total asset base has flattened since late 2021, it hasn't shrunk like SVB's did. And, while the value of Citi's available-for-sale securities has fallen a bit since the end of last year, there are more of these instruments than there were as of the middle of 2022. Most notably about Citi, however, is that nearly half of its assets can be readily sold without doing too much harm if the need arises. Again for comparison, less than one-fourth of Silicon Valley Banks' debt and fixed-income portfolio was readily available for liquidation.
Data source: Citigroup. Chart by author.
Wells Fargo (WFC 0.42%) is in good shape as well, even if it's not looking quite as good as Citigroup. Only a little over one-fourth of its assets are of the available-for-sale type. But, its total asset base grew in value last quarter, with all of that growth coming from available-for-sale securities. Although it's hard to be certain given the data that's publicly available, it looks as if Wells Fargo is making a deliberate, proactive shift from held-to-maturity to available-for-sale assets. It's also possible at least some of the bank's available-for-sale instruments gained value last quarter. After all, interest rates peeled back a bit during that time frame.
Data source: Wells Fargo. Chart by author.
JPMorgan Chase (JPM 0.78%) is holding up well enough, too.
It's not a perfect comparison to other banks, in that JPMorgan offers relatively more investment-oriented services than most other megabanks do. Nevertheless, the same liquidity requirement applies -- the company needs the right assets in place to back up its banking and brokerage customers' deposits. It has them. Roughly one-third of its asset base is available for immediate sale, and these securities didn't lose a whole lot of value last quarter.
Data source: JPMorgan Chase. Chart by author.
And it's not just JPMorgan, Citigroup, and Wells Fargo. Bank of America's Q1 figures released on Tuesday look similarly healthy. Ditto for Morgan Stanley (MS 1.23%). Morgan Stanley's liquidity resources actually grew from $312 billion to $321 billion last quarter, with most of that consisting of highly liquid available-for-sale securities, and all of that growth coming from AFS instruments.
Connect the dots. Five of the country's biggest banks aren't showing any hint of the liquidity challenges that Silicon Valley Bank was before its implosion.
Citi, Wells Fargo, and JPMorgan are fine
Never say never. Strange things can and will happen.
From an odds-making perspective though, worries that most banks are facing the same kind of liquidity crisis that upended Silicon Valley Bank aren't merited. SVB's woes were very company-specific, with one misstep seemingly exaggerating the headaches caused by other missteps.
If this fear was holding you back from buying other bank stocks while they're down, go ahead and buy them. They're not the risky trades they've largely been made out to be over the course of the past month.
