Employers added 311,000 jobs in February, the Labor Department reported Friday, continuing a hotter-than-expected streak that has created abundant job opportunities while frustrating the Federal Reserve in its drive to contain stubborn inflation.
…
Wages grew 0.2 percent from January to February, a continued deceleration and the smallest increase since February 2022. That is likely to provide some comfort to Federal Reserve policymakers, who have closely watched earnings as a driver of inflation.
…
Average hourly earnings for workers grew at modest pace in February — and were up 4.6% compared to a year earlier. That is not too far from the rate before the current inflation spike. No sign of a “wage-price spiral” there, and yet, with inflation still hovering near 6% for now, the idea that the labor market needs to soften to slow overall consumer demand will remain.
Employment in Canada rose slightly last month after January’s jobs report raised eyebrows among economists anticipating a slowdown in the labour market this year.
In its labour force survey Friday, Statistics Canada said the economy added 22,000 jobs in February, with employment up in the private sector.
The federal agency said the country’s unemployment rate held steady at five per cent, hovering near record-lows.
The bulk of the job gains were made in health care and social assistance, public administration and utilities. Meanwhile, jobs were lost in business, building and other support services.
…
With affordability top-of-mind for many Canadians, the latest jobs report shows the gap between wage growth and inflation is narrowing. Average hourly wages were up 5.4 per cent in February compared with a year ago while annual inflation rate was 5.9 per cent in January.
Many looked at the Canadian wage gains:
Canadian wage growth picked up in February and surpassed 5 per cent, a potential setback for the Bank of Canada as it tries to subdue inflation and a rollicking labour market.
On an annual basis, average hourly wages rose 5.4 per cent to $33.16, an acceleration from the 4.5-per-cent pace in January, Statistics Canada said Friday in a report. Financial analysts were expecting wage growth of 5.1 per cent. To an extent, the numbers were influenced by the comparison to February, 2022, when lower-paid service workers were rehired after COVID-19 lockdowns, pushing down average pay that month.
…
However, labour productivity – as measured by real gross domestic product per hour worked – has fallen for three consecutive quarters. Put another way, employees are producing fewer goods and services per hour of work. To compensate for less output and rising labour costs, many companies will charge their customers higher prices.
This article had great tables, showing the swap contract implied rates before the jobs report:
… and at about 11am, when jobs had been digested and news of SVB bank was the theme of the moment:
There’s enough of a difference there to make a difference!
But the big news is that SVB Bank went bust today:
Silicon Valley Bank, one of the world’s most prominent technology financiers, failed Friday in the largest collapse of a U.S. bank since the 2008 credit crisis, stunning a sector already mired in a deep downturn.
The 40-year-old bank, a mainstay financier across the tech world, including a presence in Canada, was shut Friday by California’s Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation as receiver.
…
The shutdown of SVB stemmed from its decision in 2021 to pull back on lending and instead stash tens of billions into long-term, low-interest-rate mortgage-backed securities.But as interest rates rose, bond values fell, saddling SVB with a paper loss, which it crystalized when it was forced to sell some bonds for a US$1.8-billion loss.
SVB revealed the loss and plans to hastily sell US$2.25-billion in shares on Thursday. That sent its stock price tumbling 60 per cent, and prompted calls by some venture capital firms for companies in their portfolios to pull deposits with SVB, which set off a run on the bank.
Sounds like somebody at SVB skipped the lecture on Risk at CFO school! But banking can be a tough business – unless you’re protected from foreign competition – and I’ve done nowhere near enough study of the issue to justify pointing a finger.
The failure had an effect on markets:
The KBW regional banking index ended the session down 2.4% while the S&P 500 financials index lost 1.8%.
…
In Toronto, the S&P/TSX composite index ended down 311.8 points, or 1.55%, at 19,774.92, its lowest closing level since Jan. 5.For the week, the index was down 3.9%, its biggest weekly decline since September.
…
Financials, the most heavily-weighted sector on the TSX, fell 2.2%, including declines for the six major bank stocks.Information technology lost 2.5%, while energy was down 1.3% even as U.S. crude oil futures settled 1.3% higher at $76.68 a barrel.
All ten major sectors ended lower.
But there were other bankruptcies:
Bank of Montreal is buying LoyaltyOne Co., which runs the Air Miles loyalty rewards program, after the company filed for credit protection as a result of heavy debts and stiff competition.
Air Miles launched in Canada in 1992. BMO BMO-T -2.65%decrease
is currently the company’s leading partner, and a number of its credit cards are tied to the loyalty rewards program. BMO is buying Air Miles out of creditor protection for US$160-million, plus some assumed liabilities.The Air Miles program has hemorrhaged partners over the past few years. The company relies on strong relationships with leading retailers, which offer the loyalty program’s reward points to customers, and receive marketing data and tools from LoyaltyOne in return. Retailers have also historically liked that the program helped to create repeat customers.
The partners Air Miles has shed in the past two years include the LCBO – which sells alcohol in Ontario – Lowe’s and Staples Canada.
In June, 2022, Air Miles suffered a major blow when grocers Sobeys and Safeway, which are owned by the same company, left the program. At the time, the Sobeys relationship represented roughly 10 per cent of adjusted earnings before interest, taxes, depreciation and amortization for Loyalty Ventures Inc., LoyaltyOne’s U.S.-based parent company.
With excellent timing, the New York Fed has released a staff report by Nicola Cetorelli, Mattia Landoni, and Lina Lu titled Non-Bank Financial
Institutions and Banks’ Fire-Sale Vulnerabilities:
Banks carry significant exposures to nonbanks from direct dealings, but they can also be exposed, indirectly, through losses in asset values resulting from fire-sale events. We assess the vulnerability of U.S. banks to fire sales potentially originating from any of twelve separate nonbank segments and identify network-like externalities driven by the interconnectedness across nonbank types in terms of asset holdings. We document that such network externalities can contribute to very large multiples of an original fire sale, thus suggesting that conventional assessments of fire-sale vulnerabilities can be grossly understated and highlighting the value of treating nonbank financial institutions as one organic whole for monitoring purposes.
…
The risk exposures of banks from direct links to NBFIs are certainly of first-order importance. The inability of NBFI counterparties to honor their liabilities would cause losses and possible distress, with a potential for further shock propagation. However, banks may also be exposed to NBFIs indirectly, simply by virtue of common asset holdings: there may be states of the world where certain nonbanks may experience distress, and as a result they may be forced to sell assets at fire-sale conditions. Such asset sales, in turn, may depress prices and thus impair the net worth of banks that hold similar assets. In addition to recent, prominent examples of fire sales by British pension funds and U.S. money market funds (Li et al., 2021), this behavior has been documented for many other NBFI types, such as insurance companies (Merrill et al, 2021; Ellul et al., 2011; 2015), broker-dealers (see, e.g., Rosengren, 2014; Begalle et al., 2016; Carlson and Macchiavelli, 2020), hedge funds (Edwards, 1999) and equity and bond mutual funds (Coval and Stafford, 2007, Falato et al., 2021).
…
The analysis has allowed us to rank order the twelve NBFI segments along separate dimensions: First, in terms of the relative ability to impose direct, first-round losses on banks. Finance companies and life insurers are at the top of this ranking, because of their size and direct asset overlap with banks. Second, on the basis of segments’ capacity to impose aggregate losses, once the knock-on, second-round effects are taken into account. Bond and equity funds, but also pension funds, rise at the top of the ranking because they can impose diffused first-round losses across all segments or concentrated losses on segments highly influential on banks. Third, we also rank segments for their role as vectors of shock propagation. Along this dimension, life insurers and P&C insurers are at the top of the ranking because of their very diversified asset portfolios, which make them especially vulnerable to first-round losses originating from a diverse cross-section of other segments.
And the IMF has released a working paper by Divya Kirti, Maria Soledad Martinez Peria, Prachi Mishra and Jan Strasky titled What Policy Combinations Worked? The Effect of Policy Packages on Bank Lending during COVID-19:
This paper analyzes the impact of fiscal, monetary, and prudential policies during the COVID-19 pandemic on bank lending across a broad sample of countries. We combine a comprehensive announcementlevel dataset of policy actions with bank and firm-level information to analyze the effectiveness of different types of policies. We document that different types of policies were introduced together and hence accounting for policy combinations, or packages, is crucial. Lending grew faster at banks in countries that announced packages combining fiscal, monetary, and prudential measures relative to those that relied on some, but not all, policy dimensions. Within packages including all three types of policy measures, banks in countries with more and larger measures saw faster loan growth. The impact was larger among more constrained banks with low equity levels. Large packages combining fiscal, monetary and prudential policies also increased liquidity for bank dependent firms, but did not disproportionately benefit unviable firms.
… and the BoC updated its Indicators of financial vulnerabilities:
The loan-to-income (LTI) ratio is a measure of initial affordability. It is calculated when a new mortgage is issued and compares the size of the mortgage to the gross income stated by the homebuyer when they qualified for the mortgage. Research by Bank staff found that, all else being equal, homebuyers with higher LTI ratios are more vulnerable to financial stress (Bilyk, Chow and Xu 2021). This means that highly indebted homebuyers are more likely to fall behind on debt payments if they experience a negative income shock or a rise in mortgage interest rates. The Bank uses the share of new mortgages with an LTI ratio greater than 450% to identify the most vulnerable households.
The mortgage debt service ratio (DSR) measures the share of income a homebuyer dedicates to their mortgage debt payments. All else being equal, a household that spends a large portion of its income on mortgage payments may be more vulnerable to financial stress—it may be more likely to fall behind on debt payments if a negative income shock or a rise in mortgage interest rates were to occur. The Bank uses the share of new mortgages with a mortgage DSR greater than 25% to identify the most vulnerable households.
There are other charts available. I must compliment the BoC on the design for this page – the charts are very easy to download. Well done!
It was a funny day for the Canadian preferred share market – TXPR was down about 80bp shortly prior to the close, but was only down 8bp when everyone packed up for the weekend.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
|||||||
| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.7302 % | 2,518.9 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.7302 % | 4,831.2 |
| Floater | 8.95 % | 9.20 % | 49,272 | 10.08 | 2 | 0.7302 % | 2,784.3 |
| OpRet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.1720 % | 3,332.0 |
| SplitShare | 5.05 % | 7.16 % | 51,669 | 2.73 | 7 | -0.1720 % | 3,979.1 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.1720 % | 3,104.7 |
| Perpetual-Premium | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.2131 % | 2,745.0 |
| Perpetual-Discount | 6.21 % | 6.36 % | 65,670 | 13.34 | 35 | -0.2131 % | 2,993.3 |
| FixedReset Disc | 5.54 % | 7.58 % | 90,426 | 12.06 | 61 | -0.7610 % | 2,218.3 |
| Insurance Straight | 6.18 % | 6.25 % | 82,861 | 13.57 | 20 | 0.7172 % | 2,907.2 |
| FloatingReset | 10.00 % | 10.29 % | 36,028 | 9.38 | 2 | -1.6682 % | 2,535.6 |
| FixedReset Prem | 6.57 % | 6.49 % | 217,329 | 3.96 | 2 | -0.1967 % | 2,354.3 |
| FixedReset Bank Non | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.7610 % | 2,267.5 |
| FixedReset Ins Non | 5.42 % | 7.15 % | 74,803 | 12.28 | 13 | -1.4666 % | 2,395.9 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| IFC.PR.A | FixedReset Ins Non | -6.10 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-10 Maturity Price : 16.48 Evaluated at bid price : 16.48 Bid-YTW : 7.67 % |
| CU.PR.H | Perpetual-Discount | -4.33 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-10 Maturity Price : 20.57 Evaluated at bid price : 20.57 Bid-YTW : 6.44 % |
| CM.PR.P | FixedReset Disc | -3.69 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-10 Maturity Price : 16.71 Evaluated at bid price : 16.71 Bid-YTW : 7.99 % |
| IFC.PR.G | FixedReset Ins Non | -3.36 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-10 Maturity Price : 20.71 Evaluated at bid price : 20.71 Bid-YTW : 7.15 % |
| BMO.PR.W | FixedReset Disc | -3.27 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-10 Maturity Price : 16.85 Evaluated at bid price : 16.85 Bid-YTW : 7.93 % |
| TD.PF.C | FixedReset Disc | -2.86 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-10 Maturity Price : 17.00 Evaluated at bid price : 17.00 Bid-YTW : 7.90 % |
| TD.PF.D | FixedReset Disc | -2.18 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-10 Maturity Price : 18.40 Evaluated at bid price : 18.40 Bid-YTW : 7.67 % |
| BN.PF.B | FixedReset Disc | -2.11 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-10 Maturity Price : 17.62 Evaluated at bid price : 17.62 Bid-YTW : 8.39 % |
| TD.PF.E | FixedReset Disc | -2.04 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-10 Maturity Price : 18.77 Evaluated at bid price : 18.77 Bid-YTW : 7.56 % |
| RY.PR.H | FixedReset Disc | -2.00 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-10 Maturity Price : 17.64 Evaluated at bid price : 17.64 Bid-YTW : 7.64 % |
| PWF.PR.T | FixedReset Disc | -1.94 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-10 Maturity Price : 18.75 Evaluated at bid price : 18.75 Bid-YTW : 7.51 % |
| BMO.PR.T | FixedReset Disc | -1.84 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-10 Maturity Price : 17.04 Evaluated at bid price : 17.04 Bid-YTW : 7.88 % |
| TRP.PR.F | FloatingReset | -1.79 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-10 Maturity Price : 15.87 Evaluated at bid price : 15.87 Bid-YTW : 10.29 % |
| MFC.PR.N | FixedReset Ins Non | -1.73 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-10 Maturity Price : 17.00 Evaluated at bid price : 17.00 Bid-YTW : 7.83 % |
| MFC.PR.L | FixedReset Ins Non | -1.71 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-10 Maturity Price : 17.25 Evaluated at bid price : 17.25 Bid-YTW : 7.70 % |
| CM.PR.O | FixedReset Disc | -1.71 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-10 Maturity Price : 17.85 Evaluated at bid price : 17.85 Bid-YTW : 7.63 % |
| BMO.PR.S | FixedReset Disc | -1.64 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-10 Maturity Price : 18.00 Evaluated at bid price : 18.00 Bid-YTW : 7.65 % |
| NA.PR.W | FixedReset Disc | -1.63 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-10 Maturity Price : 16.88 Evaluated at bid price : 16.88 Bid-YTW : 7.92 % |
| NA.PR.E | FixedReset Disc | -1.59 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-10 Maturity Price : 21.60 Evaluated at bid price : 21.60 Bid-YTW : 6.84 % |
| SLF.PR.J | FloatingReset | -1.54 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-10 Maturity Price : 15.37 Evaluated at bid price : 15.37 Bid-YTW : 9.79 % |
| CU.PR.E | Perpetual-Discount | -1.52 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-10 Maturity Price : 19.50 Evaluated at bid price : 19.50 Bid-YTW : 6.34 % |
| FTS.PR.M | FixedReset Disc | -1.50 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-10 Maturity Price : 17.10 Evaluated at bid price : 17.10 Bid-YTW : 8.14 % |
| TD.PF.A | FixedReset Disc | -1.48 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-10 Maturity Price : 17.27 Evaluated at bid price : 17.27 Bid-YTW : 7.77 % |
| NA.PR.S | FixedReset Disc | -1.37 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-10 Maturity Price : 18.05 Evaluated at bid price : 18.05 Bid-YTW : 7.76 % |
| BN.PF.G | FixedReset Disc | -1.26 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-10 Maturity Price : 15.72 Evaluated at bid price : 15.72 Bid-YTW : 9.07 % |
| GWO.PR.T | Insurance Straight | -1.21 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-10 Maturity Price : 20.40 Evaluated at bid price : 20.40 Bid-YTW : 6.33 % |
| BN.PR.R | FixedReset Disc | -1.18 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-10 Maturity Price : 14.25 Evaluated at bid price : 14.25 Bid-YTW : 8.91 % |
| RY.PR.Z | FixedReset Disc | -1.17 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-10 Maturity Price : 17.75 Evaluated at bid price : 17.75 Bid-YTW : 7.59 % |
| TRP.PR.G | FixedReset Disc | -1.16 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-10 Maturity Price : 17.10 Evaluated at bid price : 17.10 Bid-YTW : 8.27 % |
| MFC.PR.Q | FixedReset Ins Non | -1.15 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-10 Maturity Price : 20.60 Evaluated at bid price : 20.60 Bid-YTW : 7.08 % |
| SLF.PR.G | FixedReset Ins Non | -1.13 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-10 Maturity Price : 13.11 Evaluated at bid price : 13.11 Bid-YTW : 8.04 % |
| NA.PR.G | FixedReset Disc | -1.09 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-10 Maturity Price : 21.44 Evaluated at bid price : 21.76 Bid-YTW : 6.95 % |
| TD.PF.J | FixedReset Disc | -1.08 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-10 Maturity Price : 22.15 Evaluated at bid price : 22.80 Bid-YTW : 6.60 % |
| IAF.PR.B | Insurance Straight | -1.08 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-10 Maturity Price : 19.25 Evaluated at bid price : 19.25 Bid-YTW : 5.99 % |
| MFC.PR.M | FixedReset Ins Non | -1.01 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-10 Maturity Price : 17.56 Evaluated at bid price : 17.56 Bid-YTW : 7.73 % |
| CM.PR.Y | FixedReset Disc | 1.07 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2024-07-31 Maturity Price : 25.00 Evaluated at bid price : 24.60 Bid-YTW : 6.87 % |
| CM.PR.T | FixedReset Disc | 1.14 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-10 Maturity Price : 23.53 Evaluated at bid price : 24.03 Bid-YTW : 6.79 % |
| GWO.PR.L | Insurance Straight | 22.47 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-10 Maturity Price : 22.06 Evaluated at bid price : 22.35 Bid-YTW : 6.33 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| RY.PR.M | FixedReset Disc | 41,242 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-10 Maturity Price : 18.12 Evaluated at bid price : 18.12 Bid-YTW : 7.45 % |
| BMO.PR.S | FixedReset Disc | 36,990 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-10 Maturity Price : 18.00 Evaluated at bid price : 18.00 Bid-YTW : 7.65 % |
| BMO.PR.E | FixedReset Disc | 34,758 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-10 Maturity Price : 21.36 Evaluated at bid price : 21.65 Bid-YTW : 6.87 % |
| MFC.PR.I | FixedReset Ins Non | 26,590 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-10 Maturity Price : 22.34 Evaluated at bid price : 23.06 Bid-YTW : 6.59 % |
| TRP.PR.C | FixedReset Disc | 22,900 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-10 Maturity Price : 11.55 Evaluated at bid price : 11.55 Bid-YTW : 9.12 % |
| RY.PR.J | FixedReset Disc | 22,600 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-10 Maturity Price : 18.80 Evaluated at bid price : 18.80 Bid-YTW : 7.49 % |
| There were 26 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| MFC.PR.M | FixedReset Ins Non | Quote: 17.56 – 20.45 Spot Rate : 2.8900 Average : 1.6852 YTW SCENARIO |
| IFC.PR.A | FixedReset Ins Non | Quote: 16.48 – 18.04 Spot Rate : 1.5600 Average : 0.8877 YTW SCENARIO |
| CM.PR.Q | FixedReset Disc | Quote: 18.95 – 20.50 Spot Rate : 1.5500 Average : 1.0986 YTW SCENARIO |
| BN.PR.T | FixedReset Disc | Quote: 14.60 – 15.70 Spot Rate : 1.1000 Average : 0.6877 YTW SCENARIO |
| RY.PR.O | Perpetual-Discount | Quote: 22.65 – 23.65 Spot Rate : 1.0000 Average : 0.6042 YTW SCENARIO |
| BIP.PR.E | FixedReset Disc | Quote: 21.75 – 23.00 Spot Rate : 1.2500 Average : 0.9645 YTW SCENARIO |
talk about “imagine the stupidity”
svb essentially plowed the substantial majority of their assets into longer durations right at the bottom of yields, on eve of major liftoff in rates with absolutely no offsetting hedges (ie primarily short term depos vs long term assets)
a friend scoured thru financials and could only find a table that displayed what a 200 bps rise in rates would do to NII (effectively saying rates go up, they make more interest)…
but without a single mention of what that would do to the m2m of the portfolio and thus capital position so they basically dropped 12% on a 200bb bond bet
banks and insurance co’s tend to better match duration of assets/liabilities. stunned a regulatory wouldn’t have picked this up sooner
either way, cfo wins award for dumbest bond trader ever
“so they basically dropped 12% on a 200bb bond bet”
Well, the liquidation value dropped that much but that isn’t a problem in held-to-maturity accounting … if H-T-M accounting is appropriately used. In H-T-M accounting, the entity employing it must have the intention to hold to maturity AND the ability. SVB had the former, not the latter which was the real problem.
This was a major failure in governance by the Board and regulator and also a major failure in execution by the C-suite. Heads should roll but H-T-M should not be taken to the woodshed.
needless to say, the securities portfolio wasn’t the full 200bb but a healthy chunk of that. will be interesting to see the clearing price of the loan book but undoubtedly will sell at a discount to clear.
clearly HTM accounting needs improving upon especially when there is such a gross mismatch in durations. would also think securities are always m2m
also not so sure they had intention to hold all those 10yr bonds to maturity given imploding deposits.
think this is likely a case of the punch drunk mentality that rates must always remain at zero that was so widespread, particularly in tech land
last thought…
little doubt these guys made a massive bet, rates fall they undoubtedly sell and claim earnings, rates rise and they invoke htm
I’ll have more to say tonight – probably – but I can’t resist pointing out here that according to their 2022 Financial Statements (available through their IR page). SVB had $15,160-million in unrealized losses in their HTM portfolio (page 125 of the PDF).
They had $16,004-million “Total SVBFG stockholders’ equity” (page 95 of the PDF).
HTM haa got to go!
james,
can you determine if that total svbfg equity was net of unrealized losses or were those losses were a footnote?
agree wholeheartedly on htm needing to go or major overhaul, particularly where massive duration gaps exist and/or large securities portfolios
omg, i see it now. the balance sheet has them at cost less amortizied amount (91bb) but there is a little note in parathensis about cost of 97bb and fmv of 76bb)
the difference wipes out equity
had heard of lower of cost or market, was unfamiliar with the concept of higher of cost or market!
given the timing of the bond market, likely q2 and q3 last year showed equity all but wiped out back then…
apologies for the clutter..
10s ended q2=3, q3=3.8, q4=3.8 with my usual rounding so time to dig up q3 balance sheet.
equity was likely wiped out 6 months ago
wasnt quite wiped out end q2 but was so by q3
absolutely nuts this went largely unnoticed (stock was in downtrend but…)
[…] Those of an inquisitive bent might care to examine SVB’s investor relations page, particularly the 2022 Annual Financials. As I said here: […]