Bond losses push Silicon Valley bank parent to raise capital

SVB, the parent of Silicon Valley Bank, late Wednesday said it would book a $1.8 billion after-tax loss on sales of investments and seek to raise $2.25 billion by selling a mix of common and preferred stock. The bank’s assets and deposits almost doubled in 2021, large amounts of which SVB poured into U.S. Treasurys and other government-sponsored debt securities. Soon after, the Federal Reserve began its rate-hiking campaign.

Rising interest rates cause the value of existing bonds with lower payouts to fall in value. That can hit the value of banks’ debt holdings, even if they don’t immediately realize a loss.

SVB shares fell more than 35% Thursday.

Regulators in recent months have raised concerns about banks’ unrealized losses on investment securities. The Federal Deposit Insurance Corp. in December reported that U.S. banks’ unrealized losses on available-for-sale and held-to-maturity securities totaled $690 billion as of Sept. 30, up 47% from a quarter earlier.

In a Dec. 1 speech, FDIC Chairman Martin Gruenberg said: “The combination of a high level of longer-term asset maturities and a moderate decline in deposits underscores the risk that these unrealized losses could become actual losses should banks need to sell investments to meet liquidity needs."

SVB’s debt securities declined substantially in value last year, but in ways that weren’t always reflected in SVB’s earnings and shareholder equity, as noted in a Wall Street Journal article. As of Dec. 31, SVB’s balance sheet showed securities labeled “available for sale" that had a fair market value of $26.1 billion, which was $2.5 billion below their $28.6 billion cost. Under the accounting rules, the available-for-sale label allowed SVB to exclude the paper losses on those holdings from its earnings and regulatory capital, although the losses did count in equity.

In a press release Wednesday, SVB said it had sold substantially all of its available-for-sale securities. The company said it decided to sell the holdings and raise fresh capital “because we expect continued higher interest rates, pressured public and private markets, and elevated cash burn levels from our clients as they invest in their businesses."

SVB’s year-end balance sheet also showed $91.3 billion of securities that it classified as “held to maturity." The significance of that label is that it allows SVB under the accounting rules to exclude paper losses on those holdings from both its earnings and equity.

In a footnote to its latest financial statements, SVB said the fair market value of those held-to-maturity securities was $76.2 billion, or $15.1 billion below their balance-sheet value. The fair-value gap at year-end was almost as large as SVB’s $16.3 billion of total equity.

SVB hasn’t wavered from its position that it intends to hold those bonds to maturity. Most of the held-to-maturity securities consisted of mortgage bonds issued by government-sponsored entities, such as Fannie Mae. Those bonds don’t pose credit risk, meaning they won’t default. But they do present market risk, including interest-rate risk, because bond values fall when rates rise.

Write to Jonathan Weil at jonathan.weil@wsj.com