The collapse of Silicon Valley Bank (NASDAQ: SIVB ) revealed a weakness in the financial system that many investors had not previously noticed.
Thanks to near-zero interest rates and unprecedented economic stimulus measures to kick-start the US economy amid the Covid-19 pandemic, cash piled up in banks and with that cash banks bought Treasury bonds. As interest rates rose again, the value of those Treasury bonds fell, but Silicon Valley banks had no choice but to sell them at a loss as struggling startups drew on their reserves.
This situation eventually led to a panic that brought down the most important bank in the innovation industry and hit bank stocks around the world. However, Silicon Valley Bank is not the only institution exposed to such risks. According to a March 13 study by four professors on bank fragility titled Monetary Tightening and US Bank Fragility in 2023: Mark-to-Market Losses and Uninsured Depositor Runs, 186 U.S. banks could experience similar deposit runs. which Silicon Valley Bank faced.
Amid fears of more bank collapses, another hot topic is speculation that depositors fleeing smaller banks will park their cash. Some say it will go to the Treasury, while others predict gold and other safe haven assets will be the beneficiaries. Concrete numbers are few and far between at this point, but more than $15 billion to Bank of America Corp. (NYSE:BAC) in just a few days, according to unnamed insider sources cited by Bloomberg.
Fears have grown that regional banks are no longer safe
The aforementioned bank vulnerability study was authored by University of Southern California professor Erica Juwei Jiang, Northwestern University’s Kellogg School of Management Gregor Matvos, Columbia Business School’s Tomasz Piskorsky, and Stanford University’s Amit Seru.
Four professors attempted to analyze the rise in interest rates for American banks. The U.S. banking system’s market value for held-to-maturity loan portfolios is $2 trillion less than suggested by accounting for assets, they wrote, showing off the bat that the banking sector as a whole faces significant risks.
While mark-to-market assets fell by about 10% across all banks, the authors highlighted that the bottom fifth percentile saw an average decline of 20%. They said that uninsured leverage (ie, uninsured loans/assets) is key to understanding whether these losses bankrupt some US banks, as uninsured depositors risk losing some of their assets if the bank fails.
Although US governments have promised to backstop all deposits, none of that has been baked into law yet, so the risk still stands. The professors found there were 186 banks with a negative insured deposit coverage ratio, meaning their deposits could actually be at risk without government intervention.
The study did not name the banks at risk, but on the positive side, it found that only 1% of banks in the U.S. had higher unsecured leverage than Silicon Valley banks, while only 10% were undercapitalized.
“Too Big to Fail” Bank of America sees increase in new deposits
With fear comes certainty, and as America’s second largest bank, Bank of America is about as certain as it gets in terms of a safe place to deposit.
Widely considered too big to fail, Bank of America and its major bank peers are subject to stricter regulations than smaller banks because they have more to lose if they misappropriate customers’ capital. In exchange for their diligence in keeping risk to a minimum, the U.S. government assures them that if too many big banks fail, they will be sure to save the day.
It is true that some cash may be rerouted to other assets in search of yield, but depositors generally need a certain amount of liquidity on hand. Therefore, it is no surprise that, according to Bloomberg, anonymous insider sources said that Bank of America saw more than $15 billion in new deposits in the days after the Silicon Valley bank collapse.
For comparison, Bank of America’s deposits averaged $1.9 trillion in the fourth quarter of 2022, 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 higher interest rates.
As depositors flee to the safety of Bank of America accounts, the bank is a major winner of the Silicon Valley bank panic. The extra deposits should help it generate more income from higher interest rates and slow down the need to sell assets at a loss as customers use their savings to top up their savings in this high inflation environment.
Despite this growth, Bank of America was not immune to the recent bank stock selloff. Its stock has declined 12.50% since Wednesday, March 8, hitting a 52-week low. The Price-book ratio sits at 0.93 and Forward dividend yield has increased to 3.07%.
Bank of America stock hasn’t been this cheap since the 2020 market crash. Since then, the bank has provided investors with a Three-year dividend growth rate of 9.2%.
This article appeared first Guru Focus.