Investors wiped out $52.4 billion from the market value of the four largest US banks by assets on Thursday amid a widespread sell-off in financial stocks that analysts linked to investor fears about the value of lenders’ bond portfolios.
The sell-off in JPMorgan Chase, Bank of America, Citigroup and Wells Fargo appeared to have been fueled by difficulties at Silicon Valley Bank, a small tech-focused lender.
Late on Wednesday, SVB announced it had lost about $1.8 billion after selling a $21 billion portfolio of securities it had redeemed in response to a fall in customer deposits. The losses prompted the bank to announce a share sale to bolster its capital position.
The hefty losses on the sale of the SVB securities have shifted investors’ attention to the risks that may be lurking in the massive bond portfolios of other US banks, many of which have invested an influx of deposits into long-term securities such as Treasure Chests.
The value of those positions has fallen sharply in price over the past year as interest rates have risen rapidly.
The KBW Bank index fell more than 7 percent, its steepest drop since June 2020, as investors dumped bank shares fearing a financial shock during the early months of the Covid-19 pandemic.
San Francisco-based First Republic Bank, a high-net-worth bank and member of the banking index, fell more than 16 percent.
Wells Fargo analyst Mike Mayo described the sell-off as the banking industry’s “SIVB moment,” referring to SVB’s ticker on Nasdaq. He said the tech-focused lender’s weakness was not illustrative of an industry-wide problem, but nonetheless impacted investor sentiment.
Thursday’s selloff came just days after data from the Federal Deposit Insurance Corporation, a banking regulator, showed U.S. lenders sat at about $620 billion in combined unrealized losses in their securities portfolios.
That is far less than the industry’s total equity of $2.2 trillion at the end of 2022. Total realized losses last year were $31 billion.
However, rising paper losses have coincided with a drop in deposits in banks as savers look for higher yields at a time when the Federal Reserve continues to raise interest rates.
The worst-case scenario for banks would be that they would have to follow the SVB by selling some of their securities at a loss to cover deposit withdrawals.
Christopher Whalen of Whalen Global Advisors said SVB’s actions had drawn attention to the issue of bond portfolios and unrealized losses. However, he added that if banks had to realize the losses, it would not affect the solvency of most lenders.
“The banks with the big treasury books have the biggest problem. They fell asleep. No one expected this continued inflation,” he said.
Rates are not going up today. But you don’t have to. They just have to stay where they are – banks will have to admit huge losses. Everyone looks at these losses and flags them to the market.”