The leading financial news story of the past five days has been the collapse of Silicon Valley Bank. It is the largest bank to fail in the U.S. since Washington Mutual in 2008. The bank is the 16th largest in the U.S., with some $209 billion in assets as of December 31, according to the Federal Reserve.
Here is our understanding of what happened and how it affects or doesn’t affect you.
SVB Financial, the parent company of Silicon Valley Bank (SVB), is a commercial bank based in the tech hub of California. Most of their clients are startups and venture-capital firms. During the pandemic, their clients generated lots of cash that they deposited at the bank. SVB bought tens of billions of dollars of primarily longer-term U.S. Treasuries and government-backed mortgage securities with this cash. This was no problem in and of itself.
However, as interest rates rose rapidly in 2022, those securities were suddenly worth less on the open market than they were valued at on the bank’s books. As a result, they could only be sold at a loss. Meanwhile, the bank’s deposit inflows turned to outflows as its clients burned cash and stopped attracting new capital. On Wednesday SVB said it had sold a large chunk of its securities, worth $21 billion at the time of sale, at a loss of about $1.8 billion after tax. Many of SVB’s clients lost confidence and began withdrawing assets even quicker, triggering a “bank run” and the collapse.
On Sunday night the Treasury Department, the Federal Reserve, and the Federal Deposit Insurance Corp. jointly announced emergency measures to shore up confidence in the banking system. The measures include guaranteeing all deposits of SVB and Signature Bank, a failing bank that provided lending to cryptocurrency companies. The protection will cover all deposits, not only those below the $250,000 FDIC limit. This facility will be funded by a special assessment on banks, not U.S. taxpayers. It is not a bailout like during the Financial Crisis.
Although the news of SVB’s collapse might feel raw, we believe there is no reason to withdraw deposits from the banking system broadly. The duration risk of SVB’s bond investments looks quite different from most banks, placing them at greater risk of a situation like this unfolding during the rising interest rate environment. We expect that most of our clients and friends will not be directly impacted by SVB. Indirect effects are being felt if owning other bank stocks or banking sector mutual funds or ETFs because investors are re-pricing bank stocks broadly.
The SVB news illustrates the great interconnectedness of our world. This – and every – news event causes reactions that become woven into the constantly evolving path of the financial markets. Since personal financial planning plots a long-term course, these gyrations are likely to not necessitate a change of your strategy. Let us know if you have questions or concerns.