The bank’s stock has fallen drastically during market opening hours on account of the durational risks associated with its investments and the rapid increase in interest rates. Over the course of the past few years, Western Alliance Bancorporation (WAB) has experienced significant expansion. Because the bank is seeing an increase in the rates of deposits, it has been forced to switch to more borrowing by the bank itself in order to maintain sufficient funding. A concern is that there are fewer deposits, less equity, and concerns on the asset book. Given all of this, there is a preponderance of uncertainty, which makes the current situation challenging for both investors and deposit holders.
Uncertainty Reigns Over
The bank is comparable to the struggling SVB Financial Group, as these perceived similarities (even if they do not apply to the same extent) generate a great deal of unpredictability in this context. As a direct consequence of this, investors are liquidating their positions, and depositors are making withdrawals before asking any questions. At the moment, the market as a whole is being hindered by two factors that are interconnected. The average interest rate that many banks pay their depositors is less than one percent, which is significantly lower than risk-free rates. This rate difference, the cash needs of customers, and concerns about the industry are all contributing factors that are resulting in deposit outflows right now. This shouldn’t be a problem as long as the bank has adequate liquidity, but now we’re getting into the second problem, which is that large sums of money have been invested by financial institutions in government and agency securities, such as Treasury and Agency Securities, which do not necessarily involve credit risk; however, the duration risks associated with these investments, combined with the rapid increase in interest rates, has resulted in these investments being considered “underwater.” The fact that many of these assets are classified as held-to-maturity securities means that this is not an issue; however, the reality is that banks that are seeking liquidity are now forced to sell some of these investments at a loss, which raises concerns about capital.
Updated Financial Figures
The bank provided an update regarding the situation at SVB Financial Group on March 10th, following the recent events there. The business reported that its deposits totaled $61.5 billion, which is actually an increase of nearly $8 billion from the end of 2022. This indicates that the company is doing well. The deposits include equity fund resources and life science deposits totaling $8 billion, as well as deposits from technology-related companies totaling $8 billion. The company reports that it has cash and cash equivalents worth $2.5 billion on its balance sheet. However, the company also has many billions of dollars in collateralized credit facilities with the Federal Home Loan Bank of San Francisco, the Federal Bank, and many commercial banks.
Despite the capitalization updates addressed by management, wherein the losses on the investments appear to be relatively low when compared to the total capital, the data on the amount of money that has been deposited so far this year are promising, but it’s possible that investors are worried about the deposit flows because they can quickly change. This is demonstrated by the fact that SVB experienced a staggering $42 billion in withdrawals in just one single day. Hence, it is very clear that the situation is simply too uncertain and not compelling (given the asymmetric risks) for depositors or investors at this point until further news flows.