Quick shot: SVB, Signature and the rest: 4 questions, 4 answers
Silicon Valley Bank (SVB) imploded last week, marking the largest bank failure since 2008 (and the first since 2020).
Silicon Valley Bank (SVB) imploded last week, marking the largest bank failure since 2008 (and the first since 2020). Even though the Global Financial Crisis was 15 years ago, many are still scarred from the contagion, wealth destruction, and job loss that were hallmarks of the great recession.
1. In short, what happened? Banks were already off to a jittery week as Cleveland-based Keycorp said it faced mounting competition to attract depositors (with rates higher, banks have been under pressure to up the ante on deposits, or pay more, to keep savers in the door—if they can’t hack it, they risk their customers going elsewhere).
But the intense selling came as SVB said it was seeing large deposit outflows from its tech-heavy clients (who, for months in the wake of a more difficult growth and interest rate environment, had been burning their cash). The warning sent other customers into panic, who all wanted to pull their deposits at once (California officials said customers initiated withdrawals of $42 billion on Thursday). A bank run ensued, leaving SVB with a negative cash balance of $958 million by day’s end.
To be able to pay their depositors and improve liquidity, SVB sold $21 billion of securities at a loss of $1.8 billion. It also attempted to raise equity to shore up its finances but failed, and the bank was deemed both illiquid and insolvent. By Sunday night, the Treasury, Fed, and FDIC issued a joint statement that SVB depositors would have access to their money by Monday morning.
2. I keep hearing Silicon Valley Bank is different. How? While there are probably other regional banks that have similar deposit bases and concentrated lending books, none were quite as uniquely exposed as Silicon Valley Bank.
We look towards its deposit base as one example – SVB sourced less than 10% of its deposits from retail clients (which are viewed as “stickier” than corporate or institutional deposits). What’s more, more than 1/3 of that deposit base was early-stage technology and healthcare. Because capital markets have been closed and fundraising difficult, these companies had a high degree of cash burn. In fact, in many ways SVB is the latest (and largest) casualty in the tech recession that has been happening for the last six months.
3. Is there risk of contagion? There are probably some more repercussions to come from the SVB failure. Sunday afternoon, Signature Bank, with a similar story, was closed by New York State financial regulators.
But systematically important banks are strong – diversified deposits, less vulnerable assets (due to floating rate loans), other revenue sources, and are better regulated.
However SVB is ‘systemic’ in the sense that it represents keen concern about the road ahead. Volatility happens when least expected… and investors are certainly anxious.
4. What should you do as we await news on next steps? Firstly, stick to your long-term plan that’s built to weather events such as these.
In our view, core bonds remain our highest conviction idea for investors to have the potential to lock in decade-high yields and recession protection in the event of a broad downturn.
For more information on SVB and the market-moving events of last week (we’d be remiss not to hint at Friday’s nonfarm payrolls, which was ironically a so-called “goldilocks” report), be sure to check out last week’s Top Market Takeaways. You can also find us in Quick Shots through the week with any relevant updates.
All market data from Bloomberg Finance L.P., 3/12/23
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