Bank Shares Slide as Bond Losses Pass $326.7 Billion: SVB Repeat?

This week, bank shares slid in the US, Europe and Singapore after the 10-year US Treasury yield climbed above 5.35%, a level not seen since 2002. The higher yield reduced the worth of bonds held on lenders' books.

A similar dynamic contributed to the collapse of Silicon Valley Bank (SVB) in 2023. At the end of June, US banks still had $326.7 billion in unrealized losses on bonds, before another jump in yields.

Why Rising Yields Push Bank Stocks Lower

Large chunks of bank money sit in government bonds. If newly sold bonds come with higher yields, the resale value of older, lower-yielding bonds drops.

In its report, the Federal Deposit Insurance Corporation (FDIC), the US deposit insurer, estimated those unrealized losses at $326.7 billion for the second quarter.

Yields have risen further since then. On October 7, the 10-year yield touched a 24-year peak.

Meanwhile, the Invesco KBW Bank ETF, which tracks major US lenders, is roughly 13% below its August high, according to TradingView data.

How Far the Bank Stocks Selloff Has Spread

Europe's main bank index fell 3.5% on October 7. Reuters reported that Société Générale, Deutsche Bank, UniCredit and Intesa Sanpaolo each lost more than 4%.

The same bond problem applies to European banks. As yields climb, their sovereign debt holdings lose value, and traders worried France's debt strains could spread.

In Singapore, OCBC dropped 5.9% that day after Citi cut its rating to sell. DBS and UOB fell as well.

AsiaOne, citing Jeffries analyst Joanna Cheah on Singapore banks, said the declines were "increasingly about expectations and valuation rather than a deterioration in fundamentals."

Could Another SVB Collapse Happen?

A bank's paper losses turn into actual losses only if it is forced to sell its bonds. SVB was forced to sell after depositors sought to withdraw $42 billion in a single day. It collapsed within 48 hours.

"By the end of the day on March 9, $42 billion in deposits were withdrawn from SVB in 10 hours, or roughly $1 million every second." – SVB CEO Greg Becker Senate testimony

This time, the figures look different. Tom Michaud, KBW's chief, said in his Q3 earnings outlook that bond losses represent about 5% of bank capital, compared with 19% in 2023.

The FDIC also reported that US deposits rose for the eighth consecutive quarter through June.

"The banking industry continued to maintain strong capital and liquidity levels," the FDIC said in its Quarterly Banking Profile.

Even so, according to Michaud, the bond concerns at KBW's trading desk are now similar to those of 2023. He cautioned that the losses could temper share buybacks at some banks.

Investors are also piling up cash. Money market funds attracted $166 billion in a single week.

JPMorgan, Goldman Sachs, Citigroup and Wells Fargo are due to post earnings on October 13. The reports will reveal how deeply the bond slump has cut into bank capital.