sethford

Silicon Valley Bank unit economics clarify what happened. And frame likely deposit recoveries. Like & comment if you want the excel. 6 points: *1) Basic bank math* Banks take deposits and use them to make loans. The delta between interest on loans and interest paid to depositors is the 'net interest margin' ("NIM") - the core metric of bank profitability. And the delta between assets and liabilities is the bank's equity - the core metric of bank safety. To generate positive NIM, banks make long-term loans at higher rates than they pay on deposits. *2) Bank math at SVB* Before the issues, SVB held $212B of assets against $200B of liabilities - a paper equity cushion of $12B (5.6% of assets). The assets fall into 3 buckets: #1: Mortgage backed securities: $82B (83% residential) #2: Direct loans: $74B (55% short term loans to VCs & PE) #3: Liquid assets: $55B The liabilities fall into 2 buckets: #1: Deposits: $174B (~11% FDIC insured) #2: Other debt & pref: $25B *3) What happened?* The Fed raised rates, making all long-term debt decline in value. Including SVB's assets. But accounting rules let SVB book mortgage securities as "held-to-maturity" (HTM), avoiding a hit to book equity. In a December footnote, however, it disclosed the HTM book had $15B of "unrealized" (i.e. off-book) losses. So even at that point, losses had wiped out the $12B equity cushion. *4) What catalyzed the run?* The wipeout of the bank's tangible equity cushion was concerning. But the losses were visible to anyone watching SVB closely. So what changed? SVB announced Wednesday it had sold $21B of liquid assets (from bucket #3) at a 9% loss and would raise money to cover the loss. That concerned investors a bit - greater losses than expected and a poor NIM outlook. But, more significantly, it spooked depositors (and their VC investors). *5) Bank run* The next day (Thursday), depositors attempted to withdraw $42B from the bank, of which math implies ~$16B succeeded. Leaving the bank with negative ~$1B of cash when the FDIC took over Friday. *6) Simplistic recovery math* The balance sheet is pretty clear now given how rapid the event was. The starting point is ~$10B of paper equity ($12B minus the $2B recognized AFS loss). The range of HTM & other book loss is $20-40B based on the unrealized loss at Dec, the loss on the sale of the AFS book, and market moves. On net, that impairs assets by $10-30B against a deposit & debt base of ~$162B (deposits of $168B minus the $16B deposit outflow and ~$10B of FDIC insured deposits, plus ~$20B of other debt). Add in liquidation cost and that implies in the 5-20% loss range on remaining deposits. Investors will spend time putting a finer point on this. As always though, the key is to watch headlines, but do math. Without a solid grounding in the numbers, you're at the whim of someone else's narrative. That's all for now. Like & comment if you want the excel.