Silicon Valley Bank Fails
Unless you work in tech, you had probably never heard of Silicon Valley Bank before recently. It had billions of dollars in deposits, but fewer than two dozen branches, and generally catered to a very specific crowd of startups, venture capitalists, and tech firms. Banking regulators shut down Silicon Valley Bank, or SVB, last Friday after the bank suffered a sudden, swift collapse, marking the second-largest bank failure in US history. Just two days prior, SVB signaled that it was facing a cash crunch. It first tried to raise money by selling shares and then it tried to sell itself, but the whole thing spooked investors, and ultimately, it went under. On Sunday, March 12, the federal government said it would step in to make sure all of the bank’s depositors would have access to their funds by Monday, March 13. Regulators also shuttered another bank, Signature Bank of New York, which was heavily concentrated in the crypto currency space, and the federal government said its depositors’ money would be guaranteed as well.
Since this story is dominating the news cycle right now, we thought we would answer some of the common questions we are getting and offer a few thoughts on the situation.
1) What is SVB, and how big is it?
Silicon Valley Bank was founded in 1983 in Santa Clara, California, and quickly became the bank for the fast-growing tech sector there and the people who financed it (as was its intention). The bank itself claimed to bank for nearly half of all US venture-backed startups as of 2021. It’s also a banking partner for a lot of the venture capital firms that fund those startups. SVB calls itself the “financial partner of the innovation economy.” All that basically means it’s tightly woven into the financial infrastructure of the tech industry, especially startups. This arrangement has been great for SVB when things were great for the tech industry and not so great when they weren’t. SVB had more than $200 billion in assets when it failed. At the end of last year, they were the 16th largest bank by deposits, behind Morgan Stanley and in front of Fifth Third Bank. SVB is the largest bank to fail since the Great Recession, as well as, again, one of the largest US banks to fail ever.
2) What happened to SVB?
Silicon Valley Bank failed largely as the result of a good old-fashioned bank run after signs of trouble began to emerge in the second week of March. The bank takes deposits from clients and invests them in generally safe securities, like bonds. As the Federal Reserve has increased interest rates, those bonds have become worth less. That wouldn’t normally be an issue — SVB would just wait for those bonds to mature — but because there’s been a slowdown in venture capital and tech more broadly, deposit inflows slowed, and clients started withdrawing their money. On Wednesday, March 8, SVB’s parent company, SVB Financial Group, said it would undertake a $2.25 billion share sale after selling $21 billion of bonds from its portfolio at a nearly $2 billion loss. The move was meant to shore up its balance sheet. Instead, it spooked markets and clients. The share price of SVB Financial plunged on Thursday. By Friday morning, trading of the stock was halted, and there was reporting SVB was in talks to sell. Big-name Venture Capital companies reportedly started to tell their companies to pull their money out of the bank while they could. This caused the bank run and made it so SVB couldn’t meet the request for redemptions and by about midday Friday, regulators shut the bank down.
3) What does this mean for the banking system, and should I be worried about my bank?
It is very likely that a lot of banks have losses in their bond portfolios because of rising interest rates. However, it is very unlikely that other banks have huge losses relative to their capital base like SVB did. Most normal banks are also much more diversified than SVB. The Federal Reserve and Treasury have already intervened by guaranteeing all bank deposits. The Fed has also created a Bank Term Funding Program to “support American businesses and households by making additional funding available to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors.” Will more banks fail? That seems doubtful for “normal” banks. The intervention by the Fed and Treasury will likely stop the flight of deposits out of banks, making this situation less likely to repeat itself.
The SILVER LINING for stocks in this situation, is that in the last 48 hours the 10-year and 2-year treasury yields have dropped dramatically. We believe that this could be the bond market beginning to price in the notion that the Fed will be forced to slow down their historical interest rate-hike experiment. As short term interest rates have been forced higher at an unprecedented pace, there will be unintended consequences. This regional bank/SVB problem being one that has just come to the surface. We believe the dramatic, almost instant large drop in Treasury yields after the SVB story hit the headlines is the bond market clearly sending a message that it believes that going forward, the Fed will be forced to slow or stop interest rate hikes. Most investors would agree that one of the primary forces keeping stock prices down recently is the idea that the Fed will continue to raise rates, making it nonsensible to invest in risk assets when investors could soon collect 4,5,6,7,8 or whatever risk-free government interest rate the Fed decides is high enough to slow inflation for the long run. If the bond market is right, this could be a sign that the end of the rate-hike experiment will soon come to a conclusion. It’s difficult to say for sure, but this is potentially a good thing for the stock market. We’ll continue to monitor the landscape and keep you informed.
The BOTTOM LINE: The Silicon Valley Bank story is worthy of headlines as it’s not often that banks this large fail. We did not own SVB stock, and do not own any of these regional bank stocks or venture capital funding companies. The Fed & Treasury are taking steps to immediately limit any contagion effects from this situation. This event may be noticeable enough to get the Fed to pause and consider, “how much is too much” with their inflation fighting strategy. When they decide they are done raising rates, the long-term upside opportunity for stocks from today’s prices looks very promising.
As always, please feel free to call us with any questions or if you would like to discuss this in more detail.