Taps Coogan – March 13th, 2023

Back in October, we shared this interview with Chris Whalen, Whalen Global Advisors Chairman, bank analyst, and author of The Institutional Risk Analyst, in which he presciently warned that we were repeating elements of the Savings and Loans (S&L) Crisis from the 1980s and early 1990s.

Chris Whalen was back with Blockworks Macro on Friday to share his thoughts on the Silicon Valley Bank (SVB) failure, which he described as fundamentally driven by that S&L phenomenon.

The interview should really be watched in its entirety but the punchlines are this:

Despite narratives to the contrary, the majority of SVB’s assets were in ‘low’ risk securities like mortgage backed securities (MBS). The problem for SVB is the problem that led to the S&L Crisis in the 1980s/1990s. The ‘low’ risk securities underpinning banks are very low yielding, long duration, and yielding less than rising funding costs. When falling deposits forced SVB to sell securities to meet reserve requirements, they had to be sold at a loss. That only served to highlight the unresolvable solvency issue and exacerbated a run on deposits, dooming the bank.

While SVB is one of the more exaggerated examples of this issue thanks to the nature of their depositors and their borrowers (venture capital folks that have been decimated over the past year), the underlying funding problem is a near universal one for the banking sector.

For that reason, Mr. Whalen lays the blame for SVB’s failure squarely at the feet of the Fed. Ultra accommodative policy that drove yields to absurdly low levels has made attempts to now tighten monetary policy and combat inflation toxic to the banking sector. He states that unless the Fed pivots more-or-less immediately, other banks will fail.

While SVB deserves a bit more credit for their downfall than he acknowledges and most big banks are still very far from reserve requirements and the need to raise capital, he is spot on that the funding issue for the banking sector isn’t going anywhere. He calls on the Fed and Treasury to immediate shore up confidence by backstopping depositors and pivot monetary policy.

Since the interview was given, the government has guaranteed full access to deposits at SVB and Signature Bank.