| Topics: Accounting For Investments Summary: A related article SVB Stock Halted After Sharp Selloff; Bank Exploring Possible Sale states that The panic surrounding SVB kicked off Wednesday [March 8, 2023], when the company said it would book a $1.8 billion after-tax loss on sales of investments and seek to raise $2.25 billion by selling a mix of common and preferred stock. This article explains that those investments were treasury securities purchased throughout the Covid-19 pandemic with ever-increasing deposits during the technology boom from this banks niche customers. The value of these safe assets fell rapidly as the U.S. Federal Reserve Bank raised interest rates following the pandemic; losses became more visible when the bank had to sell them to satisfy depositor withdrawals. Classroom Application: The article may be used in class discussing accounting for investments or banking in general. The December 31, 2022, balance sheet in the SVB Financial Group Form 10-K filing shows that $91 bn of a total of $120 bn of investment securities were classified as held-to-maturity as of December 31,2022. The fair value of $76 bn on that date is disclosed parenthetically in the description on the face of the balance sheet. The filing is available athttps://www.sec.gov/ix?doc=/Archives/edgar/data/0000719739/000071973923000021/sivb-20221231.htm#ibb4dd73a1d3f4bff944b5d35fd2c5e2a_184Links to an external site. Questions: - What is a run on a bank?
- Why is it impossible for a bank to survive a run on its deposits without outside financial assistance?
- How does insurance by the Federal Deposit Insurance Corporation (FDIC) fill some of this need for outside financial assistance to banks?
- Why did SVB have over $150 billion in uninsured depositsthat is, deposits in accounts with balances greater than $250,000, the limit for coverage by FDIC deposit insurance?
- A related article, SVB Stock Halted After Sharp Selloff; Bank Exploring Possible Sale, states that SVB said it would book a $1.8 billion after-tax loss on sales of investments and seek to raise $2.25 billion by selling a mix of common and preferred stock. According to the description in this article, what were those investments?
- Define the investment categories of held-to-maturity, available-for-sale, and trading. Cite your source for these definitions.
- Based on the description in the article, what category of investments do you think it that SVB was forced to sell to satisfy its depositors demands to withdraw money? Explain your answer.
- The Fed is the lender of last resort, why didn't the Fed loan SVB the funds to stem the bank run?
- Did social media contribute to the bank run?
- How does the banking system supply capital to businesses for capital budgeting projects? Will rising interest rates and shortages of capital hurt capital investment?
|
Additional articles: KPMG Gave SVB, Signature Bank Clean Bill of Health Weeks Before CollapseDownload KPMG Gave SVB, Signature Bank Clean Bill of Health Weeks Before Collapse WSJ, by Jonathan Weil, March 13, 2023 Why the Banking Crisis May Just Be BeginningDownload Why the Banking Crisis May Just Be Beginning TET, by Jeff Carson, March 30, 2023 Why Americans Are Having A Harder Time Getting CreditDownload Why Americans Are Having A Harder Time Getting Credit TET, by Kevin Stocklin, April 10, 2023 |
