Bank stocks got whacked today by an item on the list of disclosures by SVB Financial, owner of Silicon Valley bank. These disclosures included a massive capital raise to shore up the balance sheet, and massive actions to shore up liquidity, including selling $21 billion in “available-for-sale” bonds at a whopper of a loss of $1.8 billion. SVB has lots more bonds it can sell at even bigger losses. SVB’s shares collapsed by 69% today, from $267 at the close on March 8 to $85 afterhours on March 9.

Many mid-size banks got crushed today. Obviously, SVB, which had $210 billion in assets on December 31, takes the cake. Other winners today: PacWest Bancorp (-25.4%), Western Alliance Bancorp (-12.9%), Signature Bank (-12.6%), East West Bancorp (-8.4%).  You get the idea.

What rattled folks today was that SVB lost $1.8 billion on the sale of $21 billion of “available-for-sale” securities. It sold them because it needed to raise liquidity and to “reposition” its balance sheet. Its depositors are startups that once had a huge amount of cash on deposit at the bank that they’d obtained from venture capital investors. But those startups are burning cash like there is no tomorrow, and they aren’t getting new funding, and so they’re draining their deposits from the bank. And the bank has to fund those cash withdrawals.

If banks don’t offer competitive interest rates on their deposits, retail and business depositors sooner or later figure it out and switch their cash from savings accounts that offer 0.2% or from transaction accounts and cash management accounts that offer 0%, to brokered CDs and Treasury bills that offer over 5%, and to money market funds that offer between 4.5% and 5%.

Banks can hang on to those deposits if they raise their rates to 4% or 4.5%, but that would squeeze their profit margins. So they don’t, and deposits are fleeing.

To fund the deposit outflow, banks can use the cash they have on hand, and they can use the cash they have on deposit at the Fed (what the Fed calls “reserves”). Banks have $3 trillion on deposit at the Fed. This is instant liquidity banks can use to fund deposit outflows. And they currently earn 4.65% on their cash on deposit at the Fed.

Bank Stocks Got Wacked: Between a Rock and a Hard Place as Banks Run Out Free Money | Wolf Street