The collapse of Silicon Valley Bank (SIVB, Financial) revealed a weakness in the financial system that most investors had previously paid little to no attention to.
Thanks to near-zero interest rates and unprecedented economic stimulus measures to kick-start the U.S. economy amid the Covid-19 pandemic, cash deposits built up at banks, and with that cash, banks bought Treasury bonds. As interest rates rose again, those Treasury bonds declined in value, yet Silicon Valley Bank had no choice but to sell them at a loss as struggling startups drew on their reserves.
This situation eventually led to the panic that toppled the most important bank in the innovation industry and dealt a blow to bank stocks around the world. Silicon Valley Bank is not the only institution that was exposed to this risk, though. According to a March 13 study on bank fragility by four professors, titled “Monetary Tightening and U.S. Bank Fragility in 2023: Mark-to-Market Losses and Uninsured Depositor Runs,” as many as 186 U.S. banks may be exposed to the same kind of deposit run that Silicon Valley Bank faced.
Amid the fears of further bank collapses, another hot topic of speculation is where depositors fleeing small banks will park their cash. Some have said it will go to Treasuries, while others speculate that gold and other safe haven assets will be beneficiaries. Solid numbers are few and far between at this point in time, but according to anonymous inside sources quoted by Bloomberg, more than $15 billion when to Bank of America Corp. (BAC, Financial) within a matter of days.
Fears mount that regional banks are no longer safe
The above-mentioned bank fragility study was written by professors Erica Xuewei Jiang of University of Southern California, Gregor Matvos of Northwestern University’s Kellogg School of Management, Tomasz Piskorski of Columbia Business School and Amit Seru of Stanford University.
The four professors sought to analyze the exposure of U.S. banks to rises in interest rates. “The U.S. banking system’s market value of assets is $2 trillion lower than suggested by their book value of assets accounting for loan portfolios held to maturity,” they wrote, showing right off the bat that the banking sector as a whole faces significant risk.
While marked-to-market assets have declined approximately 10% across all banks, the authors highlighted that the bottom fifth percentile saw average declines of 20%. They said that “uninsured leverage (i.e., Uninsured Debt/Assets) is the key to understanding whether these losses would lead to some banks in the U.S. becoming insolvent,” as uninsured depositors run the risk of losing some of their assets if the bank fails.
Even with the U.S. government’s promises to backstop all deposits, none of that has been baked into law as of yet, so the risk still stands. The professors found there were 186 banks with a negative insured deposit coverage ratio, meaning their deposits could indeed be at risk without government intervention.
The study did not provide the names of the banks at risk, but on the positive side, it did say that only 1% of banks in the U.S. have higher uninsured leverage than Silicon Valley Bank, while just 10% had lower capitalization.
"Too big to fail" Bank of America sees surge in new deposits
With fear comes a retreat to certainty, and as the second-largest bank in the U.S., Bank of America is about as certain as it gets in terms of a safe place for deposits.
Widely regarded as being too big to fail, Bank of America and its major bank peers are subject to stricter regulations than smaller banks as there is too much to lose if they were to mismanage customers’ capital. In exchange for their diligence in keeping risk to a minimum, the banks that are too big to fail have the reassurance that, should they stumble, the U.S. government would swoop in to save the day.
It is true that some cash may be rerouted to other assets in search of yield, but depositors typically need a certain amount of liquidity on hand. Thus, it is no surprise that, according to Bloomberg, anonymous inside sources said Bank of America saw more than $15 billion in new deposits in the days following the Silicon Valley Bank collapse.
For comparison, Bank of America’s deposits averaged $1.9 trillion in the fourth quarter of 2022, which was down $92 billion year over year. Still, $15 billion is a lot to move over the course of just a few days, and it puts Bank of America in a more advantageous position to take advantage of the benefits of higher interest rates.
With depositors fleeing to the safety of Bank of America accounts, the bank is undeniably a major winner of the Silicon Valley Bank panic. The extra deposits should help it generate additional income from higher interest rates while helping to slow down the need to sell off assets at a loss as customers use their savings to make ends meet in this high inflation environment.
Despite this boost, Bank of America was not immune to the recent bank stock selloff. Its stock has dropped 12.50% since Wednesday, March 8, falling to 52-week lows. The price-book ratio sits at 0.93 and the forward dividend yield has risen to 3.07%.
Bank of America stock has not been this cheap since the 2020 market crash. Since then, the bank has also rewarded investors with a three-year dividend growth rate of 9.2%.