If you follow the news at all, financial news or not, I am sure you have heard about Silicon Valley Bank. On Friday, March 10, Silicon Valley Bank failed. Upon it’s failing, SVB was placed into the receivership of the FDIC. SVB was the largest FDIC-insured institution to fail since Washington Mutual failed in 2008. Since this stunning collapse, a crypto-centered bank has failed and a prominent Swedish bank called Credit Suisse needed to be saved from failure via a buyout from another bank. So, what really happened with SVB? How did this collapse even happen in the first place? Many are confused that a bank that was recently heralded by television analysts for its bright future could fall so quickly. I would say this is as good of an example as any as to why you shouldn’t believe everything you see on T.V.! This failure and subsequent failure scares also have the public scared that another 2008 type situation is about to rear its ugly head. While the painful memories of the crisis of 15 years ago are fresh in our minds, our current situation is not quite the same.
It is important to set the record straight on what happened in the case of Silicon Valley Bank. In 2008, the failure of the banking system was in large part due to massive amounts of credit risk taken. Almost every bank had junk mortgages on their books that did not pay when the time came due. This is not what got SVB in trouble. The current interest rate environment is what caused SVB’s downfall. This is a story of balance-sheet mismanagement. While the Fed continues to raise interest rates, outstanding bonds continue to lose value. Interest rates and bond prices have an inverse relationship. As rates rise, bond prices fall because the rates attached to these existing bonds are not as favorable as newly issued debt. This inverse relationship proved costly for SVB.
The balance sheet of Silicon Valley Bank was littered with Treasury securities which are very interest rate sensitive. As rates continued to rise, the value of these securities dropped to a point where SVB was facing solvency issues. Solvency is the ability of a financial institution to pay its debts. At that point, the FDIC took the bank into receivership, which is what happens when a failed financial institution’s assets need to be liquidated for payment to creditors and depositors. So, what does this mean for the banking system as a whole?
We, along with our Research team at LPL Financial, do not see this as another 2008-type event. As we mentioned earlier, this was a case of disproportionate interest-rate risk, not the credit risk problems we saw widespread in 2008. This interest-rate risk and subsequent balance sheet mismanagement is not a systemic issue among other banks. SVB’s balance sheet looked like few other large banks in the system. While the news is concerning and conjures up painful memories, we do not believe we are headed for a failure of the entire banking system.
This also means that long-term investors should not be worried. While short-term markets will remain volatile due to the fragility in sentiment around the banking system, conditions are likely to improve before long. We believe this this storm too shall pass. On the bright side, this may create more buying opportunities as the markets fluctuate. One additional thing to keep in mind as we move forward is that the federal government, for better or worse, is committed to bailing these large banks out via short-term funding to those that need it. This to would decrease the likelihood of a system-wide bank failure. What support would look like for smaller, regional banks remains to be seen. With any other questions about this topic, feel free to reach out to our team for a chat!
1 https://nypost.com/2023/03/10/cnbcs-jim-cramer-touted-silicon-valley-bank-stock/