The Underwater Banks

Although the issues with the banking system have been swept under the rug, their problems are not over yet. An FDIC report sheds light on the still-bleeding wounds of these mighty institutions.

In March 2023, a small regional banking panic erupted onto the world stage as one of the largest private equity banks blew up- Silicon Valley. SVB, long used as the custodian of choice of many Venture Capital and Private Equity Funds, had been swallowing large depositors by the thousands as they went after funds, HNW individuals, and individual startups who had just raised millions in early-stage financing in Southern California. 

The bank had loaded up on long-term US Treasury bonds during the pandemic, buying billions of dollars worth of low-yielding debt due to the massive Fed easing program pumping money into the banking system. As Powell had continued this program, banks, with reserves swelling their balance sheets, were looking for a good place to park this capital. Due to regulatory requirements, tax incentives, and legal incentives, Treasury bonds were one of the primary places this new money flowed into. Banks as a whole began buying Treasury debt en masse. 

As we can see here in a breakdown of SVB’s AFS security portfolio, their holdings of Treasury Securities increased by around $2B in a year, along with a $1.1B increase in foreign government debt securities.