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SVB Collapse: Focus on risk of MBS investing

-Vinod Kothari and Timothy Lopes

finserv@vinodkothari.com

It all started after Silicon Valley Bank (‘SVB’) announced its Q1’23 Mid quarter update[1], revealing that it intended to raise about USD 2.25 billion of capital owing to the fact that it had sold its USD 21 billion ‘Available for Sale’ (‘AFS’) securities portfolio, which consisted of US treasuries and Mortgage Backed Securities (‘MBS’) and suffered a USD 1.8 billion loss.

This caused a run on its deposits that triggered the quick collapse of SVB just two days after this announcement, which is being called the ‘largest bank failure since the global financial crisis’[2]. On March 10, 2023, the SVB Financial Group announced[3] that its wholly owned subsidiary SVB was closed by the California Department of Financial Protection and Innovation and placed under Federal Deposit Insurance Corporation (‘FDIC’) receivership.

Part of the blame is being placed on the investment decisions made by SVB in long term MBS. The Financial Times[4] talks about how crazy it was that SVB did not hedge its Held-to-Maturity (‘HTM’) portfolio which comprised of very long term agency MBS maturing in 10 years or more.

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Evolution of securitisation – Genesis of MBS

finserv@vinodkothari.com

Securitisation as a concept, has a history of over 50 years. In this write up, the author traces the events leading up to the evolution of securitisation in 1970 with the issuance of the first MBS program by Ginnie Mae.