SVB discussed the sale of up to US$ 20 billion in bonds – 04/29/2023 – Market

SVB (Silicon Valley Bank) has discussed selling part of its loss-making bond portfolio as early as November 2022, according to newly released documents showing executives at the lender facing a liquidity crunch months before it succumbed to a run historic bank.

In an internal presentation code-named “Project Phoenix”, SVB executives discussed selling bonds worth up to $20 billion at a loss of $2 billion, while warning that there was no “silver bullet” to resolve the increasingly pressing problem of outflows of deposits projected to continue.

“Investor reaction is expected to be very negative,” said the board’s November presentation, with the last two words in bold and underlined.

That warning proved to be appropriate. A day after the bank released a version of the plan in March, shares in SVB Financial fell 60%. Regulators seized the bank the next day and its parent company declared bankruptcy.

Internal SVB discussion papers, dated Nov. 8, were released by the Fed on Friday as part of the central bank’s review of how it handled the second-largest bank failure. of the history of the United States.

“While we do not plan to move forward at this time,” the presentation stated, “these are options we may consider if current market conditions persist.”

If approved, the plan would mark the second time in just nine months that the Fed has decided to reverse its interest rate protection strategy.

As of early 2022, SVB had interest rate hedges designed to offset losses in its bond portfolio should interest rates rise.

But by March of that year, SVB was so confident of its financial position that it began to shed its hedges to maximize its earnings in case a recession forced the Fed to cut rates.

“Protecting profitability was the focus,” the Fed said in its report.

By November, plummeting tech valuations were causing venture capital firms to cut back on their investments, and SVB’s clientele of money-spending startups was withdrawing deposits at an alarming rate.

As the bank’s stock of liquid assets was running low, the SVB was faced with the possibility of having to sell some of its long-term bonds to meet these withdrawals. In an effort to limit the losses this would entail, the board considered buying hedges similar to those it had been selling in March.

To complete the maneuver, the SVB would have to accelerate the adoption of a new accounting standard, the documents show.

According to the board’s November presentation, “a one-time transfer of our HTM portfolio [manter até o vencimento] for AFS [disponível para venda] … for the purposes of hedging these bonds in support of interest rate management” was among the options considered.

The November discussion came a month before SVB Chief Executive Greg Becker told the Financial Times that an early sale of the HTM portfolio was out of the question.

“We have no intention of using it or selling it as we can borrow against it,” Becker said in December.

Instead, he floated it using some of the bank’s $91 billion in “off-balance sheet assets” to shore up its finances. “We have a lot of flexibility, but it would only be needed if we saw net deposit outflows,” he said. “I don’t think it’s a likely scenario.”