Analyzing the Impact of the 2023 Banking Crisis on Securities Lending

Analyzing the Impact of the 2023 Banking Crisis on Securities Lending

Alec Rhodes 

Product Specialist, Data & Analytics Solutions

April 20, 2023

The collapse of Silicon Valley Bank sent shockwaves throughout both the U.S. and global financial sector. While the 2023 banking crisis will likely not be a watershed of the same magnitude as the collapses of 2008, it was a true test of the system and unsurprisingly had a significant impact on the securities lending market.

A Sudden Decline

Intrinsically, securities lending activity is analogous to the short selling market. As a result, it logically follows to turn a curious eye to banking sector securities lending data in the lead up to the March 10th tipping point, when a bank run led to the failure of Silicon Valley Bank.
Looking at SIVB specifically, short sellers did not appear to be overtly bearish, even as the stock’s price tumbled significantly throughout 2022. Looking at the volume of loan activity in 2022, the average utilization of lendable shares was just 4.1% and was just 2.7% on March 8, 2023. From a fee perspective, lenders were also not placing a premium on the security, with the average fee to borrow SIVB firmly in the general collateral (GC) category.
The data for Signature Bank, which failed just two days after SVB, tells a similar story. The average industry utilization in the preceding year was only 2.1% and shares were lent to brokers at GC fees.

Immediate Impact

In the aftermath of Silicon Valley Bank’s failure, a swathe of U.S. based regional banks as well as several large international banks became the focus of investor concern. Several of these institutions had recently faced capital challenges dealing with macroeconomic headwinds and were poised to bear the brunt of additional bank runs or systemic failures. The following chart compares average utilization and fee change for ten of the most impacted banking securities. It highlights the stark increase in loan activity since the failure of SVB compared to the rest of 2023.

In response to the crisis, both central and multinational banks took extraordinary measures to secure depositors and infuse the system with much-needed liquidity. From a securities lending perspective, these stabilizing efforts seem to have been effective but have not eliminated uncertainty. Utilization and fees among regional banking securities remain high when compared to historical norms. However, broadly speaking, these metrics hit a relative peak on March 16th and experienced moderate cooling in the weeks since.
Analyzing KRE, a SPDR Series ETF which tracks regional banks among the S&P 500, cost-to-borrow has fallen 66% since the post-failure peak (as of March 29th). Interestingly, industry utilization of the ETF was nearly 100% in the run up to the SVB failure. This potentially indicates that investors saw short opportunities in the regional banking sector but weren’t confident in which banks were at the greatest risk as the underlying constituents did not experience nearly the same demand.
As more time passes from the depths of the crisis, securities lending participants will be closely monitoring if and when activity returns to “business-as-usual” for these securities.
About DataLend

DataLend, the market data service within EquiLend’s Data & Analytics Solutions group, tracks daily market movements across more than 62,000 unique securities in the $2.5 trillion securities finance market.

About EquiLend

EquiLend is a global financial technology firm offering Trading, Post-Trade, Data & Analytics, RegTech and Platform Solutions for the securities finance industry. EquiLend has offices in North America, EMEA and Asia-Pacific and is regulated in jurisdictions around the globe.