Making sense of SVB News

Melissa Kolcz |

One might be forgiven for thinking that runs on a bank, and banking failures, are a thing of the Great Depression, not something you encounter in modern times. One would be wrong, thanks to the highly-publicized failure of a once-obscure institution called Silicon Valley Bank, which collapsed on Friday and was taken over by federal regulators in order to protect the assets of its depositors. It was the largest failure of a U.S. bank since the 2008 economic crisis.

Is there reason to be alarmed? Probably not. Silicon Valley Bank (SVB to insiders) was kind of unique in the banking industry. Unlike most banks that loan money to local residents, small businesses and corporations, SVB lent to a very exclusive group of companies: tech startups and venture-backed health care companies. Over its 40-year existence, the bank grew with the tech industry, eventually, right before the collapse, becoming one of America’s 20 largest lending institutions, with $209 billion in total assets at the end of last year.

Unfortunately, in addition to its loan portfolio, SVB also decided to speculate roughly $21 billion of its assets in long-term bonds which, as most of us know, were not paying very high interest rates—an average of 1.79%. When interest rates doubled and then rose again, those bonds became much less valuable at exactly the wrong time: when venture capital firms were experiencing their own shortfalls and were drawing down the funds they held at SVB. The bank announced that it had sold a big part of its bond portfolio at a loss, and, at the same time, proposed to sell $2.25 billion in new shares of the bank in order to cover those losses.

On this news, some of the venture capital firms decided that it would be safer to move their assets out of SVB, which triggered a disastrous run on the bank. (If you are fond of the movie “It’s a Wonderful Life” this may remind you of the scene when bank customers are demanding funds from the bank while George Bailey begs them to take only what they need.) The bank’s share price went into a free fall, losing 80% of its value in a couple of wild trading days, and California regulators decided they’d seen enough. On Friday, they moved in to shut the bank down and place it into receivership.

The Federal Deposit Insurance Corporation guarantees any deposits up to $250,000, which means that most (if not all) of the ordinary people who banked with SVB will be made whole. In fact, according to Investopedia, “SVB depositors will have access to their money today (3.13.23), according to a joint statement from the Treasury Department, Federal Reserve, and the FDIC.”

HSBC has already stepped in to take over SVB’s U.K. arm. The U.K. Treasury said that customers of SVB U.K. will be able to access their deposits and banking services as normal. We await to see if other banks step up to buy the remainder portions of SVB, which is likely, given that the bank has relationships with a coveted clientele. The alternative is a bankruptcy process that would probably return pennies on the dollar.

The news of an impending takeover sent a wave of anxiety into the markets as investors wondered whether this might be a sign of widespread weakness in the banking industry. The stocks of smaller and regional banks took a brief and probably short-term tumble in their share prices. However, the uniqueness of SVB, and its customer base, suggests that this is an isolated event. Nevertheless, we are likely to hear about a small number of other banks that might have overextended themselves with similar (unwise) investments in long-term loans paying low interest, who were blindsided by the speed of rising rates.

As you read this, analysts are also looking at whether any of the banks they cover might have put depositor money into cryptocurrencies—whose trading markets went into a still-unexplained turmoil on the SVB news. Regulators also shut Signature Bank, a crypto-focused commercial bank based in New York.

Also looking into the whole mess is Treasury Secretary Janet Yellen, who convened a meeting of regulators in order to carefully probe the soundness of the banking system. As a result of that meeting, the Fed is creating a new Bank Term Funding Program aimed at safeguarding deposits. The facility will offer loans of up to one year to banks and other financial institutions. Along with the facility, the Fed said it will ease conditions at the discount window, which will be used for the same conditions as the Funding Program. The most likely outcome is that the SVB mess is a healthy new examination of risks and exposures, which will give the regulators time to sort out hidden risks before they lead to more collapses.

The issues with SVB are a reminder of why we rely on asset allocation and remain diversified as we truly never know what the market will throw at us next. History is no prediction of the future and we cannot guarantee future returns, however, historically those investors who stay invested and don’t panic during times of market uncertainty are often rewarded.

We thank you for your continued trust. If you have any updates to your financial picture, please reach out to us so we can discuss.


With gratitude,

Your Team at Beacon Financial Planning, Inc.