Is the Banking System in Crisis?

Is the Banking System in Crisis?

March 17, 2023

What happened?

Silicon Valley Bank (“SVB”) is a bank known for primarily serving businesses in the tech sector, with ties to private equity and venture capital, rather than consumers.

As is typical for banks, SVB invested deposits in loans and fixed income securities. Unique to SVB, however, was the size, timing and complexion of those investments. As the tech sector boomed in the post-Covid reopening, SVB’s deposits tripled by the end of 2021 (compared to 2019 levels).  In short, they put a lot of money to work in a short amount of time. In hindsight, the timing was poor as interest rates rose in 2022 and SVB’s large exposure to mortgage-backed securities created material losses in those portfolios. At the same time, much of the tech-focused customer base was experiencing pressure from declining valuations and deposits began to shrink.

As a result, SVB was forced to sell securities at a loss and sought to raise capital by selling equity to fill the gap. Markets reacted poorly to this news and the stock price precipitously fell. As concerns rose, a classic bank run occurred. In turn, the FDIC took over the bank on Friday, March 10th.

What is my exposure?

Exposure to SVB bank via equity or bond funds is very limited. Exposure was primarily in passive index funds whose rules-based approach seeks exposure to all or nearly all companies in equity or debt indices. In most well-known indices, these positions were small as a percentage of total assets.

Is the banking system in crisis?

There’s no question that the actions the Fed has been taking to address soaring inflation is having an impact on the financial system as a whole.  But it doesn’t look like a repeat of the 2008 financial crisis is in the cards.  For one, the government’s swift and decisive action, to stand behind all deposits and make cash available for withdrawals, was in stark contrast to 2008 when reluctance to act exacerbated the crisis.  Secondly, banks in general are much better capitalized compared to 2008 and primarily invest in U.S. Treasury notes which are transparent and liquid.  And lastly, the Treasury’s proactive measure to allow banks to borrow against the par value of their Treasury notes, rather than the current market value (which is lower due to rising interest rates) mitigates the insolvency issue that SVB faced.

Should I take any action?

The situation remains fluid and the market is reacting to additional Federal support. Our portfolio positioning and diversification philosophy reflects the inevitability of market volatility including those caused by scenarios like this. As the situation is still unfolding, and other banks begin to react to changing conditions in the financial system, we can be fairly certain it will continue to be a bumpy ride for a while. 

We will continue to monitor the situation and, as always, please reach out with any questions or concerns.

 

   

 

The views expressed represent an assessment at a specific point in time, are opinions only and should not be relied upon as investment advice regarding investments, strategies, sectors or markets in general.  The above commentary has been obtained from sources we believe are reliable, but we cannot guarantee their accuracy or completeness.  Past performance is no guarantee of future results. This is not a complete analysis of every material fact.  All expressions of opinion are subject to change without notice.

The information contained in this document does not constitute the rendering of legal, accounting, or other professional advice or opinions on specific facts or matters.  Talk to your financial advisor before acting on information in this document.