Bank stocks fell across the US, Europe, and Singapore this week after the 10-year US Treasury yield topped 5.35%, its highest since 2002. Higher yields cut the value of bonds banks already own.
That same squeeze helped bring down Silicon Valley Bank (SVB) in 2023. US lenders still carried $326.7 billion in paper losses on bonds at the end of June, before yields jumped again.
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Why Rising Yields Push Bank Stocks Lower
Banks park large sums in government bonds. When new bonds pay more interest, older, lower-paying bonds lose resale value.
The Federal Deposit Insurance Corporation (FDIC), which insures US bank deposits, put those unrealized losses at $326.7 billion for the second quarter, per its report.
Yields have climbed since then. The 10-year yield hit its 24-year high on October 7.
Meanwhile, the Invesco KBW Bank ETF, a fund of large US lenders, is down about 13% from its August high, TradingView data shows.
Bank stocks daily charts of the Invesco KBW Bank ETF, the EURO STOXX 50, and Singapores Straits Times Index. Source: TradingView
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How Far the Bank Stocks Selloff Has Spread
On October 7, Europes main bank index fell 3.5%. Société Générale, Deutsche Bank, UniCredit, and Intesa Sanpaolo each lost more than 4%, Reuters reported.
European lenders face the same bond problem. Rising yields cut the value of their government debt holdings, while traders feared Frances debt strains could spread.
In Singapore, OCBC dropped 5.9% the same day after Citi cut its rating to sell. DBS and UOB also fell.
“increasingly about expectations and valuation rather than a deterioration in fundamentals,” AsiaOne reported, citing Jeffries analyst Joanna Cheah on Singapore banks.
Could Another SVB Collapse Happen？
Paper losses only become real when a bank must sell its bonds. SVB was forced to sell after customers tried to pull $42 billion in a single day. It failed 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By the end of the day on March 9, $42 billion in deposits were withdrawn from SVB in 10 hours, or roughly $1 million every second.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
— zerohedge (@zerohedge) May 15, 2023
Todays numbers look different. KBW chief Tom Michaud said bond losses equal about 5% of bank capital, down from 19% in 2023, in his Q3 earnings outlook.
US deposits also grew for an eighth straight quarter through June, the FDIC said.
“The banking industry continued to maintain strong capital and liquidity levels,” said the FDIC in its Quarterly Banking Profile.
Still, Michaud said bond worries on KBW‘s trading desk now resemble 2023. He warned the losses could slow some banks’ share buybacks.
Investors are also hoarding cash. Money market funds drew $166 billion in one week.
JPMorgan, Goldman Sachs, Citigroup, and Wells Fargo report results on October 13. Those numbers will show how much the bond slump has eaten into bank capital.