The crisis of confidence in banks caused by Silicon Valley Bank's March 10 collapse continues to shake global markets, despite dramatic interventions by regulators in the U.S. and Europe.
Eyes are turned particularly toward the American regional banks because some have profiles similar to that of SVB (SIVB). And the credit-rating companies have started to downgrade their ratings on the banks or are threatening to do so.
First Republic Bank (FRC) was downgraded twice in a week by S&P Global Ratings, which says the current crisis is heavily pressuring the bank's liquidity.
Deposit Infusion Might Not Solve Other FRC Issues
"The $30 billion in deposits that First Republic reported it will receive from 11 large U.S. banks should ease near-term liquidity pressures," S&P explained in a research note on March 19. "But it may not solve the substantial business, liquidity, funding, and profitability challenges that we believe the bank is now likely facing."
S&P said First Republic Bank is facing outflows from its clients whose deposits are uninsured by the FDIC -- those exceeding $250,000 -- and as a result the rating company says the firm faces "substantial long-term challenges.'
"Following Thursday’s uninsured deposit of $30 billion by the 11 largest banks in the country, together with cash on hand, First Republic Bank is well positioned to manage short-term deposit activity," a First Republic Bank spokesperson said in an emailed statement.
"This support reflects confidence in First Republic and its ability to continue to provide unwavering exceptional service to its clients and communities."
Still, the warning from S&P maintains pressure on regional banks as investors fear contagion.
Musk Sees Uncovered Risk-Taking by the Banks
Elon Musk, the CEO of Tesla (TSLA), says regional banks can blame only themselves for the current crisis. For the founder of SpaceX and other startups, the banks find themselves in this situation because they took huge risks without covering themselves and are now paying the price.
For the techno king, as he's known at Tesla, regional banks are in trouble for putting money in bonds and not managing them properly.
The billionaire has just used an image from a romantic movie scene to explain in a humorous sway the disastrous situation in which these banks find themselves.
In the scene, the female character played by Jennifer Lawrence tells the male character played by Chris Pratt, that:
- "I like men who take risks."
-- "I manage a bond portfolio for a regional bank," responds Pratt.
Lawrence then stands up to give him a fiery kiss.
Musk pinpoints what triggered SVB's failure. The Santa Clara, Calif., bank bought bonds and mortgage-backed securities when interest rates were low. The quality of these assets was and is excellent because the issuer/borrower -- the U.S. -- is unlikely to default.
In addition, these bonds benefit from a AAA credit rating, the strongest possible, from the credit-rating companies. Since the U.S. government has the lowest credit risk, there's no chance that bondholders won't get their money back. So from a credit-risk perspective, these bonds were great investments.
The risk SVB -- and probably other regional banks -- took is market risk, which has to do with how market conditions affect the prices and quality of the bonds.
The banks didn't hedge their market risk, Musk seems to say. This is verified by the fact that when the Federal Reserve started to raise interest rates in the second half of 2021, the value of the bonds declined because they had acquired these bonds when interest rates were low. (Bond prices move inversely to interest rates.)
SVB and other regional banks also made another mistake: They could have sold these bonds immediately to limit their losses. Instead, they waited, which is further proof that the regional banks took market risks but didn't properly manage them.
