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Trepp and Commercial Real Estate Direct released the 2022 edition of The Year-End Magazine, a recap of the CRE finance and CMBS market activity, news, and trends from the year. Access the magazine Schedule a Demo Solutions By Role * Asset Manager * Appraiser & Valuation Specialist * Broker * CLO Investor & Manager * CMBS Investor * CRE Investor * Lender * Professional Services * Owner-Operator * Risk Manager By Property Type * Industrial * Lodging * Mixed-Use * Multifamily * Office * Retail * Alternative Properties By Business Line * Advisory Services * Banking & Lending * CMBS * Commercial Real Estate * Corporate CLOs Increase your operational efficiencies and investment performance. Schedule a Demo Research & Insights Company * About Us * Careers * Culture * Leadership Team * TreppEducation * Partners * Press Room Contact Us Login Solutions Research & Insights Company Contact Us Login Schedule a Demo Back to Main Navigation By Role By Property Type By Business Line Back to Solutions Asset Manager Appraiser & Valuation Specialist Broker CLO Investor & Manager CMBS Investor CRE Investor Lender Professional Services Owner-Operator Risk Manager Back to Solutions Industrial Lodging Mixed-Use Multifamily Office Retail Alternative Properties Back to Solutions Advisory Services Banking & Lending CMBS Commercial Real Estate Corporate CLOs Back to Main Navigation About Us Careers Culture Leadership Team TreppEducation Partners Press Room * Categories * Follow Us * Subscribe * All * Banks * CMBS * Commercial Real Estate * * * « View All Posts Bank Risk Analysis | Economy | Market Activity | Large Banks | Bank Loan Portfolios | Commercial Real Estate Markets SILICON VALLEY BANK FAILURE: WHAT HAPPENED AND WHAT DOES IT MEAN FOR CRE? * Share This Article * * * * March 10th, 2023 | 5 min. read Subscribe Matt Anderson & Stephen Buschbom Print/Save as PDF On Friday, March 10th, 2023, Silicon Valley Bank (SVB) collapsed and was taken over by the Federal Deposit Insurance Corporation (FDIC), making it “the second-biggest bank failure in U.S. history.” The failure comes just two days after Silvergate Capital, “one of the crypto market’s top banks,” announced it would liquidate assets and wind down the bank. While Silvergate’s failure is somewhat unsurprising given what’s transpired in crypto markets over the past year or so, SVB’s collapse is a massive wake-up call. It has rocked markets this week and is reminiscent of the sequence of events leading up to AIG and Lehman’s collapse in 2008. How Did it Happen? So, how did SVB go from blue chip bank to bust so quickly? SVB, as well as Silvergate, took in a flood of deposits during the pandemic as stimulus funds entered the economy and the tech industry thrived since the client base for these two banks is heavily weighted toward the tech industry, with SVB catering mainly to startups and venture capital firms and Silvergate catering to the cryptocurrency market. As the crypto winter and tech wreck progressed, client deposits dropped as the fortunes of these two markets reversed. Unfortunately, the bond holdings for the two banks had declined in value significantly as the Fed raised interest rates. The two banks ultimately were forced to sell bonds at a loss to cover deposit withdrawals. As news of the losses spread, deposit withdrawals accelerated and so did the bond selling. This sort of negative feedback loop is called a bank run, and it’s catastrophic, especially when it’s at an institution the size of SVB that had $200 billion in deposits as of March 2022 and saw its deposit base swell 86% over the course of 2021. Digging Deeper into Bank Industry Data As deposits swelled in 2020 and 2021, banks parked a lot of the excess cash in securities investments. Loans and leases – typically the main asset for banks – grew as well, though, with credit concerns in response to a pandemic-driven plunge in jobs and output, securities seemed a relatively safe bet and were readily available. But as interest rates rose in 2022, long-term securities investments took a hit on valuation. With the repricing of these securities, banks have been sitting on large amounts of unrealized losses. Unrealized losses on securities show up in Accumulated Other Comprehensive Income (AOCI). As shown in the chart below, AOCI has swelled during 2022, reaching nearly 15% of total bank equity at year-end 2022. These unrealized losses may never translate into actual (realized) losses if the securities are held to maturity. But if a bank is squeezed for liquidity and needs to liquidate assets – as SVB did – these paper losses may turn into actual losses, further eroding a bank’s capital base. What Does This Mean for CRE and Capital Markets? The failure of SVB and the fallout are somewhat ironic in that the Fed wants the economy to cool and financial conditions to tighten to lower inflation, but obviously not at the expense of financial stability; however, this event will cause financial conditions to tighten if lenders pull back from the market and lending liquidity is constrained. This event was exactly the kind of failure the market has been worried about for the past three to six months given the pace of rate hikes and the kind of risk that’s been building in other sectors. Specifically, there’s been concerns that crypto losses and the tech wreck could lead to credit concerns in the financial sector but that hasn’t materialized, at least not until SVB’s failure. As we saw in 2008, credit issues in the financial sector can lead to what's called the contagion effect, where shocks or disturbances in each sector, here the financial sector, create a chain reaction that spreads to other sectors and ultimately increases volatility and risk across the broader economy. This is ultimately why it seems almost inevitable that CRE credit spreads will increase, and lending liquidity will decrease over the short run regardless of any intervention from the Fed or FDIC because it takes some time for the market to pull back from and stop the fallout from a contagion effect type event such as SVB's failure. A silver lining to all the doom and gloom is that when risk increases as it has in recent days, investors flock to safe investments like treasury bonds which push down their yield and increase their price. This in turn should result in lower losses on bond sales. A minor positive, but a positive nonetheless, especially for commercial real estate borrowers, is this means that mortgage rates decrease. There are still several questions that don’t have an easy or immediate answer, however, such as whether lending liquidity is drying up, how lending spreads are reacting, and how long this fallout will last. Trepp will be monitoring the market closely so stay tuned for more bank and CRE research on this front. Are you prepared for the turmoil ahead? Whether you need to understand banks' asset compositions, liquidity and capital ratios, or stress test your loan portfolio, Trepp has a set of solutions for your needs. Request a demo of our banking data and solutions today.Learn About Trepp's Banking Products & Solutions The information provided is based on information generally available to the public from sources believed to be reliable. First Name* Last Name Email* Website Comment* Lifecycle Stage ENTER A HEADLINE THAT IS ENTICING AND ENCOURAGES THE USER TO COMPLETE YOUR CTA. Write about a sentence or two explaining the value of this offer and what the user will get by subscribing. No thanks, I am not interested. 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