Market Update: March 2023
We wanted to share our thoughts regarding SVB Financial Group and Signature Bank being taken over by federal regulators. The capital markets have been predictably frightened and volatile on this news of two bank failures. While we are always monitoring developments in the economy and financial markets, we do not believe this is the start of a wider problem. Both of those banks have unique circumstances that made them especially prone to problems.
SVB Financial Group specialized in startups and tech companies (the SV stands for Silicon Valley). Its emphasis on early-stage venture capital customers meant its deposit base was more concentrated and less sticky. As many of those companies have struggled over the last year, they began withdrawing larger amounts of money to meet their operating expenses. As customers withdrew funds, the bank had to sell its own assets to fund the withdrawals.
Which brings us to the second mistake SVB made – mismanaging their own balance sheet. SVB had their own assets largely in long-term US government and other high-quality bonds. While those assets are very likely to be repaid at face value when they mature, right now they are worth less than face value because interest rates have increased. This was a well-known risk that SVB simply did not hedge sufficiently.
This all meant that SVB was facing withdrawals which they needed to fund by selling assets at a loss. They tried to raise more capital from investors but were unsuccessful, which scared depositors and led to more withdrawals. It became a vicious cycle and a self-fulfilling prophecy, and the run on the bank had begun.
Signature Bank had a heavy focus on cryptocurrency-related customers, a sector that has been troubled ever since the dramatic drop in Bitcoin prices and then bankruptcy of cryptocurrency exchange FTX in 2022. It faced a similarly large amount of customer withdrawals last week.
Those two banks combined for over $250 billion of deposits. While that sounds like a lot of money (and it is), to put that in context, JPMorgan has about nine times as much and Bank of America more than seven times. They were not small banks, but they are not the behemoths of the banking industry.
The federal government came out in full force over the weekend. All deposits at both banks will be available to customers, even if they are over the standard limit of $250,000 for FDIC coverage. No one who used these banks will lose their money. The Federal Reserve also instituted a liquidity program for any other banks who need cash and find themselves holding high quality bonds worth less than face value at the moment.
We believe comparisons to 2008 are significantly overblown (but make for catchy headlines if you’re in the media business). Banks – especially the biggest ones – are better capitalized and take less risk because of the reforms instituted in the wake of 2008. They are not sitting on lots of junky mortgages handed out when reckless lending was rampant. Meanwhile, we believe the government’s actions to backstop deposits and provide short-term funding to banks that need it, greatly reduce the odds of a systemic crisis.
Most other banks don’t have the same concentrated exposure to one sector of the economy (tech startups, cryptocurrency) or mismanagement of their own assets. We may see more market volatility in the short-term than we would like, but this too shall pass. One silver lining is we may potentially see the Federal Reserve slow down with additional interest rate hikes, which was one of the main contributing factors to a poor 2022 for investors.
As always, please don’t hesitate to contact any member of the team.
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