Broader implications of the SVB collapse: A talk with Michael Arougheti

Michael Arougheti is the Director, Co-Founder, Chief Executive Officer and President of Ares Management, an American alternative investment manager, specializing in credit, private equity, and real estate. Ares is a publicly traded firm that manages roughly $350 billion in assets and has over 2,500 employees.

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In a recent Walker Webcast, I had the chance to get Michael’s nuanced take on the current turmoil in the banking sector and SVB’s collapse.

Why did the value of the bonds on SVB’s balance sheet seem inflated?

The value of the bonds on SVB’s balance sheet apparently were being held as “Hold to Maturity” and had been acquired prior to the Fed’s large rate increases. As a result, when the mismatch in deposits occurred, SVB became aware of deposits leaving for higher yields i.e., treasuries. As a result SVB needed to raise capital. This forced the bank to Mark-to-Market the value of the securities (e.g. treasuries, loans, etc.), thereby requiring that losses be recognized.

SVB was not alone in this situation but was unable to raise sufficient capital to meet withdrawal demands causing the government to step in and guarantee deposits. It will be an ongoing debate as to when Mark-to-Market vs. Hold to Maturity is appropriate.

How will regulation for regional banks change?

Given the recent reaction from the federal government, and its decision to make all depositors whole at the banks that have collapsed, it’s unclear what the FDIC insurance policies will look like going forward. The federal government is very unlikely to insure all depositor funds during this period of time, and then revert back to its old policy once the turbulence in the banking sector is over. Arougheti’s prediction is that we are likely to see both increased depositor insurance as well as increased oversight in the banking sector.

Over time, the number of FDIC-insured banks has been steadily declining, as depositors move their money to larger institutions. Given the recent uncertainty around regional banks, we have begun to see a further consolidation, which will likely continue into the future, as depositors move their money into institutions that are perceived as “too big to fail.”

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