Posted on 03/10/2023 3:11:29 AM PST by EBH
As interest rates have risen, many banks have become more profitable because the spreads between what they earn on loans and investments and what they pay for funding has widened. But there are always exceptions.
On March 8, SVB Financial Group sold $21 billion in securities for a loss of $1.8 billion. SVB is the holding company for Silicon Valley Bank of Santa Clara, Calif. It had $212 billion in assets as of Dec. 31.
The bank said it was repositioning to “increase asset sensitivity, to take advantage of the potential for higher short-term rates, partially lock-in funding costs, better protect net interest income (NII) and net interest margin (NIM), and enhance profitability.”
In light of the loss on the securities sales, SVB will raise $2.25 billion in new capital through two offerings and a private placement. The prospect of dilution to shareholders’ ownership positions resulted in the company’s shares sliding as much as 62% on March 9.
(Excerpt) Read more at msn.com ...
I’ve only heard of Ally.
If I understand this, this is why banks use to practice extremely conservative investment strategies and not play their version of the spot market?
They went for a short time gain on a short term investment and rates raised, do I have that right?
Recognize 3 out of 10
Suppose the bank bought $1 billion worth of long-term government bonds a a few years ago, paying an average rate of 2%. With interest rates rising as fast as they have been, the value of those existing bonds drops dramatically. Maybe those $1 billion worth of bonds are only worth $850 million if you sell them today — because anyone buying a bond paying 2% is going to demand a steep discount if they have the option of buying new bonds that pay 4%.
Under normal circumstances this would not be a big deal, because the loss of the bond value is just a “paper loss” as long as the bank just sits on the bonds and collects the 2% interest every year. Over the course of time, the value of the bonds may return to $1 billion if interest rates come back down to the same level they were at when the bonds were originally purchased.
But the bank may be forced to redeem some of its bonds today even if it doesn’t want to. If the bank has $100 million of cash on hand and its customers withdraw $200 million from their accounts — which is exactly what is happening here with SVB — then they will have to sell off $100 million of assets NOW just to raise the cash to pay their customers.
I work for one of the big banks (too big to be on that list). Our CEO is too busy hanging out in Europe colluding with assorted leftists to worry about financial conditions over here in the US. To him it’s all about climate change, equity, business after Brexit and such.
Ya. Banks usually make their money by lending deposits (which are paid almost nothing) and collecting a higher interest rate. This is called Net Interest Margin. Fractions of a percent are profitable because they have billions invested.
Since 2008 and the start of very low interest rates the spread on these deposits to Loans dropped. Banks had to turn to higher risk investments to keep their profits growing. When those investments tank…so did the banks.
I guess bankers never played baseball…because when you try to hit a home run every time you are at bat…you strike out a lot.
Thank you for the time to write all that. Good info.
bkmk
Did you have SchatGPT write that?
You’re welcome!
No, I didn’t. Was anything unclear or confusing about it?
Color me happy. They list East West Bank as in the top ten banks that expanded their margins in the past year. I’ve had an account with them for 25 years. They are A Chinese commercial bank that take private depositors. They don’t give a rats bazoo about cash transactions.
Small business owners come in with paper bags of cash and stack it up on the counter for deposit. I recently went in and said I wanted a cashier’s check for $9,900 and $10,000 in cash. They just asked what denomination and that was it. I could have gotten $50,000 in cash with no questions.
I only recognize Ally.
pacific premier is my bank on this list...ummmmm
EBH wrote:
“
Customers Bancorp, First Republic, Sandy Spring, New York Community, First Foundation, Ally, Dime Community, Pacific Premier, Prosperity, Columbia Financial
“
Thanks for the list!
You are very welcome!
You might want to have some powder on the side.
Ally used to be GMAC
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