Silicon Valley and the Large Bank Dead Pool

March 10, 2025 | Premium Service | Two years ago this week, Silicon Valley Bank imploded as the result of management incompetence and “supervisory failure,” to paraphrase Treasury Secretary Scott Bessent’s comments to the Economic Club of New York last week.  We decomposed the failure of SVB in 2023 ("Who Killed Silicon Valley Bank?; The IRA Bank Book Q1 2023").

Source: FFIEC (12/31/2022)

The Federal Reserve Board noted in their post-mortem of the failure:

“Silicon Valley Bank (SVB) failed because of a textbook case of mismanagement by the bank. Its senior leadership failed to manage basic interest rate and liquidity risk. Its board of directors failed to oversee senior leadership and hold them accountable. And Federal Reserve supervisors failed to take forceful enough action, as detailed in the report.”

The remarkable group which populated the financial portfolio of the Biden Administration left behind a huge mess. There are hundreds of banks and credit unions that have been left insolvent by quantitative easing c/o the FOMC that have not been sold or resolved. President Donald Trump and his team now own the mess. How big is the mess? A lot bigger that DOGE savings.

Start with the billions of dollars worth of impaired rent-stabilized multifamily assets left over from the failure of Signature Bank and now festering inside the FDIC's Bank Insurance Fund. After you peruse the remnants of Signature Bank, then look at the $1.5 trillion multifamily book at HUD and the GSEs. Finally, look at delinquent residential exposures at the FHA, VA and USDA after four years of hiding consumer credit problems under Uncle Joe Biden. Government-insured residential and multifamily loans are the new subprime.

"The 160,000 FHA Covid-19 Recovery Modifications performed over the last 2 years have/are running ~70% delinquent, ~55% seriously delinquent," writes John Comiskey. "The GNMA MBS disclosure data provides hard data on the majority of them with the other 40-45% of them that were never securitized likely faring worse."

We warned readers of The Institutional Risk Analyst in 2017 about the problems being caused by the Fed's massive open market purchases of Treasury and especially mortgage-backed securities ("Banks and the Fed's Duration Trap"). This was before the December 2018 misstep by Fed Chairman Jerome Powell, leading to the infamous January 2019 pivot and public rescue of Powell by Janet Yellen and Ben Bernanke. The Fed then began to aggressively ease interest rates more than a year before the COVID outbreak, even selling TBAs in the mortgage market to force interest rates down.

Unfortunately, the problems created by the Federal Open Market Committee between early 2019 and 2022 have not been resolved, leaving hundreds of banks and credit unions underwater on their securities and held-to-maturity loan portfolios. Don't forget the HTM loans. The old chart below from Bloomberg shows the index (LGNMMD) of the duration of all Ginnie Mae mortgage backed securities (MBS) from that period. The index was discontinued last year, of note.

Ginnie Mae MBS Duration Index

Total Duration of Ginnie Mae MBS

One of the key failings of the regulatory community is not to use the public data from markets and banks to track business model behavior and therefore the solvency of specific institutions. SVB was an outlier in terms of the percentage of mortgage securities to assets. Before COVID, SVB was one of the best performing banks in the US, as we noted back in 2018 (“Which Are the Best Performing US Banks?”). When you're an outlier, though, you are outside the group, thus begging the question why.

At the end of 2022, SVB had 43% of total assets in MBS vs 10% for Peer Group 1. The SVB portfolio yielded 1.9% at that time.  At the end of 2024, the half trillion dollar MBS portfolio of Bank of America (BAC) had a yield of under 2.5% vs an average cost of funds close to 3% of average total assets. Conventional 2.5% MBS for delivery in March are trading around 80 cents on the dollar, an illustration of the drag on future earnings this pile of low-coupon securities -- and loans -- represents. 

One key metric investors may use in sifting through banks is whether management of the institution effectively managed duration risk in 2020 onward. If not, did the bank at least restructure the balance sheet to restore net-interest margin? Even taking a 20 point loss on those illiquid orphan MBS 2.5s is a winner for the bank when the proceeds are reinvested at twice the yield or more.  

Most US banks have done nothing to address underwater loans and securities, hoping that the FOMC would rescue them from their gross negligence. Because a large number of bank managers have decided to sit on their hands rather than deal with the pain of restructuring an underwater bond portfolio, the earnings of the bank are impaired and the institution is more vulnerable to failure as a result. This is the primary reason, in our view, why acting FDIC Chairman Travis Hill decided last month to cease publishing the total assets of troubled banks. 

“The FDIC began disclosing the aggregate assets of banks on the “Problem Bank List” at year-end 1990, an addition to the preexisting practice of reporting only the number of problem banks,” Hill noted in February. “Since then, changes in the industry over the past 35 years have made it comparatively easier to identify a large bank that is added to the list, resulting in a number of potentially negative consequences…”

We think the decision by the FDIC and the Trump Administration to limit public information about troubled banks is poorly considered and, contrary to Chairman Hill's statement, will hurt public confidence in banks. When we worked at the FRBNY, one of the first rules in the bank supervision function was that we never talked about banks in public, any banks. FDIC putting out this statement at all was very unhelpful.

Accordingly, since the FDIC is providing less information about troubled banks, below we publish the list of banks with yields on their MBS portfolio that are well-below the industry average (~ 3%) for the benefit of the annual subscribers to our Premium Service. If you are looking to assemble a list of troubled large banks, this is where you should start IOHO.

Keep in mind, lenders are selling new residential mortgage loans into 6% MBS coupons this week, down from 6.5s last month. The fact that the US banking industry still has an average yield for MBS just below 3% illustrates the magnitude of solvency problems facing US banks five years since the outbreak of COVID. But to be fair to Secretary Bessent and Chairman Hill, this is part of a far larger financial mess in Washington left behind by the Biden Administration.

The table below from Bloomberg shows pricing for conventional MBS as of the close on Friday. Notice that 2.5% MBS for delivery in March were 82 bid, illustrating the magnitude of mark-to-market losses facing the bank. 

Conventional TBA Market

Source: Bloomberg (03/09/2025)

Having a below-peer yield on the investment portfolio does not necessarily mean that the bank is on the FDIC’s troubled bank list, but it does suggest very strongly that the bank’s management is not paying attention to managing the bank’s duration in an effective way. SVB failed because of the indifference of management to movements in interest rates.

Below we provide a table showing the Top 100 banks by MBS yield, starting with the lowest. We use data from the FDIC, the powerful tools developed by Bill Moreland and our friends at BankRegData, and another column we added showing the percentage of MBS to total assets. When you see a bank with more than 10% of total assets in MBS, that's a red flag in our book. Note that American Express Bank, one of the best performers in the industry, owns almost no MBS.

Top 100 Banks by MBS Yield | Q4 2024

Source: FDIC/BankRegData/WGA LLC

Notice the banks at the bottom of the list, like Axos Financial (AX) and Beal Financial, which have nicely managed their MBS exposure. Readers should use this list as a point of departure for thinking about banks that may be on the FDIC's now secret list of troubled banks. We would compare the banks with very low yields to the WGA Bank Top 100 list on the web site.

"The number of banks on the 'FDIC’s Problem Bank List' decreased from 68 to 66 in the fourth quarter, the FDIC noted last month. "Problem banks represented 1.5 percent of total banks at year-end, which is within the normal range of 1 to 2 percent of all banks during non-crisis periods."

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