Is The Market's Tech Obsession Overshadowing A Crisis Brewing In Regional Banking?

Amidst the never-ending flurry of media coverage surrounding high-growth tech stocks, are investors overlooking a critical issue?

Despite the obsession with tech, regional bank stocks are languishing and are being overlooked by investors, and it's not because of the recent bust of Silvergate Capital Corp SI, says Dennis Dick, co-host of Benzinga's "PreMarket Prep" show. 

The Case Of Silicon Valley Bank: SVB Financial Group SIVB, also known as Silicon Valley Bank, saw its stock plummet by over 60% after the bank announced a mandatory convertible preferred-plus offering. SBV is a lending bank that focuses on capital, particularly lending to startups, making it an aggressive lender.

It appears that the bank's problems do not stem from its venture capital lending but from its held-to-maturity (HTM) securities portfolio, which is full of long-term mortgage holdings.

After reading the details below, ask yourself — do other banks have this problem?

SVB increased its security portfolio by 700% after buying $88 billion of mostly 10-plus-year mortgages with an average yield of 1.63%, while the interest rate in the market was 5.2%, according to Raging Capital Ventures, which issued a short thesis on the stock — this can lead to grave losses if the book is marked to market.

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Raging Capital argued that if the bank's HTM portfolio was marked to market, it would be functionally underwater. SVB’s HTM portfolio grew from $13.5 billion in 2019 to $99 billion in the fourth quarter of 2021.

Are SIVB's Problems More Widespread? Dick raised concerns on Thursday's show that other banks could be in the same position, as many Americans have long-term mortgages, asking, "who is on the other side of all those mortgages?"

It is possible that other banks with aggressive lending could have the same problem, Dick said, which is a scary prospect, especially when considering today's interest rates. 

He used himself as an example: Dick has an incredibly low fixed mortgage rate on a rental unit secured with Nova Scotia bank, at just 1.64%.

He said he took advantage of this opportunity and began slowing his mortgage payments, allowing him to amortize the mortgage as far as possible.

"It's like free money for me," Dick noted. "I can turn around and invest at 5.2%. I'm literally picking up that much from the bank. There's no doubt who's losing that money. It is the bank that lent me that money and now they've got 5.2% that they're paying me on that thing."

This simply means that Dick is taking the excess savings from the amoritized mortgage and is reinvesting it with the bank, which is paying 5.2% interest.

The Last Word: This raises questions about the liability this creates for the banks, and moreso regional banks, as they tend to be more heavily weighted in mortgages than larger banks with more business units, he said. 

Despite these concerns, Dick said the Federal Reserve holds the power to prevent a potential financial crisis stemming from this by simply lowering interest rates.

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