Last week, Silicon Valley Bank was seized by regulators. That led to a series of events unseen since the financial crisis of 2008-09.
Here is what you should know.
Who: Silicon Valley Bank is the 16th largest bank in the US ($175B in deposits) and is known as the bank for venture capital with a focus on Silicon Valley tech and healthcare startups.
What: The announcement last week that Silicon Valley Bank needed additional capital to shore up its balance sheet was poorly received by markets. What followed was a classic “run on the bank” in which depositors attempted to withdraw their money very quickly which led to greater solvency concerns for Silicon Valley Bank and the banking industry as a whole. As the chart below illustrates, on March 9th alone, Silicon Valley Bank depositors attempted to withdraw $42B. Mainly because the majority of Silicon Valley Bank’s deposits (85%+) were uninsured (above the $250K FDIC limit), many venture capital clients of the bank panicked and while trying to take their money out quickly, implicitly encouraged others to do the same.
Then What? In order to protect Silicon Valley Bank customers and in order to prevent runs on other banks (“contagion effect”), on Sunday, the department of Treasury, the Federal Reserve and the FDIC stepped in to fully protect depositors of Silicon Valley Bank and Signature Bank (another small bank seized by regulators over the weekend), regardless of the size of their balances with these 2 banks. Shareholders, bondholders and the management teams of both banks didn’t however receive any protection. In addition and of great significance for the banking sector as whole, the Fed also announced a loan program to help all banks satisfy deposit withdrawals where eligible financial institutions can receive asset-backed loans for up to 1 year (at par), preventing them from having to sell securities at a loss. We view this backstop program as positive news as it should prevent contagion risk and provides an implicit guarantee that the authorities stand behind depositors of all banks across the country.
Short-term Impact: In our opinion, what happened with Silicon Valley Bank is a unique situation and should not lead to broader contagion across the banking sector. The unique nature of its client base combined with the fact that the vast majority of deposits at Silicon Valley Bank were well in excess of the FDIC $250K limit led to this herd mentality with everyone looking for the exit at the same time. For most banks, including Wisconsin and Minnesota banks, a much higher percentage of deposits are insured (below the $250K FDIC limit) and more diversified across business lines — both on the loan and deposit side. Also, following the 08-09 financial crisis, more stringent regulations increased capital requirements for banks producing far less solvency risk. So, while a run on deposits is not a risk unique to only Silicon Valley Bank, the banking industry at large today remains in one of its best capitalized positions in decades.
Long-term Impact: The banking industry may face tougher supervision, higher capital requirements, higher fees to replenish the deposit insurance fund and a renewed debate about which institutions are too-big-to-fail. We may also see tightening lending standards as banks engage in more conservative balance sheet activities which with a lag, could reinforce our thesis that a slower economy is likely ahead.
Exposure: We are not aware of any Trust Point clients owning Silicon Valley Bank or Signature Bank based on assets we custody. At this point, we are not aware of any direct exposure in these two banks with our active managers.
Bottom-line: We believe the failure is more about Silicon Valley Bank’s unique business model than it is about broader problems in the banking system. However, this appears to be the first “financial accident” from the rapid rise in interest rates we have experienced over the past year. The situation remains fluid but our defensive portfolio positioning and broad diversification philosophy should allow our clients’ portfolios to weather the storm well. We are not recommending any portfolio changes at this time.