Silicon Valley Bank Collapse and Market Implications
Given the news headlines surrounding Silicon Valley Bank, we want to provide you with a market update based on our opinions and research. We hope this arms you with sufficient information and lets you know our stance regarding your financial progress.
Ultimately, we believe we’re well positioned and don’t recommend any immediate action. Seven Springs Wealth Group has no direct holdings of Silicon Valley Bank stock, debt, or deposits. The recent news has been quite complex though, so we’ll do our best to update you on recent developments in clear terms without the jargon.
First, how did the bank collapse?
Silicon Valley Bank (SVB) appeared to be doing well in the tech boom. It enjoyed a huge increase in deposits following the covid-19 pandemic as the tech sector boomed, mostly from large venture capital businesses, with the money held on deposit with SVB tripling between 2019 and 2021. The bank had to put this money to work.
The bank invested a large portion of the deposits in long-term Treasury bonds earning approximately 1.56% with an average maturity date of over 10 years. This saw positive gains for a while, as the 1.56% rate was above the deposit rates, but it quickly unfolded.
Throughout 2022 and into 2023, the Federal Reserve increased interest rates, with the amount SVB was paying to deposit holders growing to 4.50% per annum for start-ups. This was considerably beyond the 1.56% they were receiving on the bonds. The assets they held in bonds also fell in value, due to rising interest rates, creating a double hit to their capital.
In response, SVB tried to prop up their balance sheet by selling assets. People became skittish and many quickly withdrew their money, creating a classic bank run. SVB was left with little-to-no liquidity and was suffering major losses, forcing them to default.
If you’d like to know about it in more depth, there is a lot of information out there, but this piece from Morningstar is a great starting point.
What are the salient points you need to know?
We’ll try to cover the major issues you should probably care about below:
Could this spread to other banks? For the majority of investors, this is the biggest question. We’d argue that while the rapid rise in interest rates has caused some short-term losses for the banking industry that are meaningful, industry capital levels are better positioned to weather the storm. We also believe the regulatory response from the Federal Reserve, the FDIC and the US Department of the Treasury has been quick, unified, and substantive. In the short term, we’d not be surprised to see market volatility remain elevated, reflecting the increased uncertainty around potential outcomes, but most banks have much more diversified sources of funding, and lend to a much wider range of industries. Given the fear and potential for contagion, small and mid-size banks, typically the regional and community banks, are certainly more susceptible to further deposit withdrawals.
Is it isolated to technology and crypto-related businesses? Not necessarily, but this industry is significantly more exposed, as many companies operate with negative cashflows that require ongoing funding. If the funding dries up, this can cause severe stress.
Will taxpayer funded bailouts occur? The short answer is that we don’t know. Liquidity support is being offered to protect the banks customer base, but this has been part of the role of central bank authorities for many years and one with which they are familiar.
What should I do with my bank deposits? Even with the coordinated response from the Treasury Department, Federal Reserve and FDIC, it is important to maintain deposit balances within the $250,000 FDIC-coverage limits. As Andy has previously mentioned, a great alternative is purchasing Treasury Bills directly inside your Fidelity account with yields above 4%.
What portfolio actions make sense right now? At the core, we hold a wide range of assets that are diversified by sector, industry, and designed to navigate broad risk factors. As long-term, valuation-driven, fundamental investors, this type of setup is one that we’d use to begin searching for opportunities. We obviously want to express this in your portfolio, but it is worth remembering that we want a margin of safety for any risk taken. As you know, the Federal Reserve has been rising interest rates to combat inflation, but they have also been shrinking the size of their balance sheet (which expanded significantly in response to the pandemic). The latter pulls liquidity out of the system and is a form of tightening monetary conditions, similar to rising interest rates. Currently, it appears that it will be difficult for them to continue this two-pronged approach without causing significant disruption to small and mid-size bank balance sheets. The market, economic, and inflationary implications could be significant.
Our three biggest responsibilities:
In situations like this, we believe we have three responsibilities. The first is to support you in helping you understand what matters related to your portfolio and what doesn’t. The second is to ensure we are monitoring risks and investing in line with your risk tolerance. And third, we want to find opportunities to help you reach your goals faster, come what may. Our actions are always oriented toward your financial plan and making decisions consistently over time.
Please don’t hesitate to contact us with any questions about your financial situation.
Jeremy Hutzel, CFA, CFP®
Managing Partner
