SVB And Signature Bank Were Just The Tip Of The Iceberg

The demise of Silicon Valley Bank and Signature Bank was just the tip of the iceberg. As it turns out, hundreds of banks are at risk. This explains why the Federal Reserve and US Treasury rushed to provide what is effectively a bailout for the entire banking system.

In the first week, the Federal Reserve handed out more than $300 billion in loans through its newly created Bank Term Funding Program (BTFP).

According to a Washington Post report, banks would face unprecedented losses if they were forced to liquidate their bond portfolios as SVB did.

According to the Post, the total capital buffer in the US banking system totals $2.2 trillion. Meanwhile, total unrealized losses in the system based on a pair of academic papers is between $1.7 and $2 trillion.

In other words, if banks were suddenly forced to liquidate their bond and loan portfolios, the losses would erase between 77 percent and 91 percent of their combined capital cushion. It follows that large numbers of banks are terrifyingly fragile.”

A second report by the Wall Street Journal cites a study from Stanford and Columbia Universities that found 186 US banks are in distress.

As economist Peter St. Onge put it, “In other words, we were already right up against the edge.”

This is precisely why the Fed had to create a way for banks to borrow against their devalued bond portfolio. If banks were put in a position where they had to sell those bonds to raise capital, they would have fallen like dominoes.

The Fed bailout may have plugged that hole in the dam, but there will almost certainly be more cracks in the future.

So, how did we get into this situation?

Peter Schiff summed it up during an interview with Liz Claman.

It’s because of the government that Silicon Valley Bank was in the position that it was. The reason it owned so many long-term, low-yielding US Treasuries and mortgage-backed securities was because the Fed kept interest rates at zero for so long. And the reason that it chose those assets was because bank regulators kind of pushed banks into Treasuries and mortgage-backed securities because they give them favorable accounting treatment. They don’t have to take any haircuts. They don’t have to mark them to market. So, the government created the problem.”

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