It is important to understand the U.S. banking crisis and how it will affect markets.
It's a Wonderful Life, the iconic Christmas flick, is a great example of how even financially stable banks can be ruined by a lack of trust. Despite its cheerful conclusion, this does not suggest there won't still be some negative consequences.
![James Stewart standing in the cashier cubicle of a bank in a scene from the film 'It's A Wonderful ... [+] Life', 1946. (Photo by RKO Radio Picture/Getty Images)Getty Images](/uploaded_images/4be04bc4880f6afe6dc350a82f8d3a70_1679227383.jpg)
The financial markets were rocked by the sudden collapse of Silicon Valley Bank (SIVB VB) on Tuesday, a move that has eroded investor confidence in other banks. The KBW Bank index has plummeted 22% since the beginning of the year as bank stocks come under pressure from the fallout of the Silicon Valley Bank's collapse. Financial experts believe the full impact of the Silicon Valley Bank's collapse could be felt for months to come, with many investors worried about further declines in bank stocks.
The Silicon Valley Bank has recently revealed that its data, when adjusted for the losses in its HTM portfolio, is leaving it with only a sliver of its capital remaining. This is concerning, as potential losses from its loan portfolio have yet to be accounted for. This is in stark contrast to other large regional banks and Global Systemically Important Banks (G-SIBs), who have a much more robust capital cushion, even after their losses from securities. The primary U.S. G-SIBS are JP Morgan (JPM), Bank of America (BAC), Citigroup (C), Goldman Sachs (GS), Wells Fargo (WFC), Bank of New York Mellon (BK), and Morgan Stanley (MS). These institutions are subject to additional regulatory scrutiny and higher capital requirements.
Silicon Valley Bank is facing a unique challenge: its securities portfolios are disproportionately large compared to its deposits. This anomaly has become especially problematic in the current climate, as increasing yields have resulted in substantial losses for the bank's bond portfolios. Although the situation appears dire, SVB is working to navigate the new environment and find solutions to the problem.
A new report from Goldman Sachs has revealed a significant change in Silicon Valley Bank's deposit structure since the days of the Bailey Brothers. According to the report, only 3% of Silicon Valley Bank's deposits are insured through FDIC insurance. Additionally, the average account size of Silicon Valley Bank is much higher than the average regional bank, with an average account size of $1,251,000 compared to $177,000. The large account size could be a cause for concern in the event of a bank run, as the majority of deposits are above the FDIC insurance limit and could be lost in the event of a bank failure. What's more, the ease of transferring money with just a few clicks could increase the pressure of a bank run. This report paints a vastly different picture than that of the Bailey Brothers era, where depositors would have to line up outside the bank to move their money. With the digital age upon us, the banking industry is undergoing a major transformation.
The United States banking system is in an impressive position, sitting at a multi-decade high capital level despite the current crisis. While the economic downturn has caused some banks to face rising yields and fluctuations, the banking sector does not appear to be at risk of any kind of systematic failure or collapse. Analysts are encouraged by these numbers and believe that the U.S. banking system is well-positioned to weather the current economic troubles.
