In light of SVB Financial (SIVB) being shuttered by regulators on Friday, market volatility has increased due to concerns of depositor’s ability to get their money from banks. This concern has impacted the stock prices of not only banks, but financial services stocks in general. We believe that these concerns are overblown, especially for financial services companies that have little or no business in banking. Markets do not like uncertainty and there is considerable uncertainty now surrounding banks. We don’t believe we’re in an environment that would trigger a national run on the banks. We also don’t believe this will trigger a global financial crisis, like what happened in 2008. Credit spreads for even the lower quality bonds have been stable and prices for high yield exchange-traded funds have not dropped significantly in value, like some financial stocks. The markets are likely telling us that there are not any impending liquidity credit issues that could be systemic but rather concerns about some smaller regional banks that simultaneously experienced large amounts of withdrawals while having significant exposure to assets with unrealized losses.
The Federal Reserve, in conjunction with the Treasury Department and FDIC, have stepped in to insure all deposits held by SIVB and SBNY, even those that were not naturally insured by FDIC (see https://home.treasury.gov/news/press-releases/jy1337). This backstop should alleviate concerns about clients being able to access their funds at full value. This action should also calm investors holding more than $250,000 in cash deposits or certificates of deposit. For clients holding government money market funds, treasury bills or treasury bonds, these are already secured by the full faith and credit of the US government, regardless of bank financial health.
We believe that, if necessary, the Federal Reserve will pause rate increases and possibly cut rates or pause quantitative tightening to keep the financial system functioning properly. Fed funds futures are already pricing the easing of financial conditions.
As for why this happened, there are still many details that will likely emerge, but this much we do know:
- SIVB was a lender to many venture capital companies and startups, several being in the technology and healthcare industries. Some of these companies have struggled with a challenging market due to higher rates and lower growth prospects. Some may have needed to withdraw larger amounts of cash.
- SIVB held large amounts of deposits by these companies, well in excess of what FDIC insures.
- Due to very relaxed reserve requirements that were instituted during the pandemic and very low long-term rates, some banks such as SIVB added significant exposure to longer duration bonds that paid higher yields than shorter term rates but were still near multi-decade low rates. Some high-quality assets (e.g. treasuries, mortgage-backed securities) dropped significantly in value when rates increased over the last year. When rates increase, bond values of even the highest quality bonds decline. This is amplified for securities that don’t mature for several years.
- SIVB attempted to raise capital to meet redemptions and was unsuccessful, being forced to sell bonds at a loss of $1.8 billion.
- Last Friday, March 10, 2023, the California Department of Financial Protection and Innovation shut down SIVB and FDIC was appointed receiver and created the Deposit Insurance National Bank of Santa Clara, to which all insured deposits were transferred.
As a society and over many years, we have been through multiple financial crises. We have gotten through all of them and have come out stronger, adapted, and have learned from each one. We are confident that this will be no different and that we will get through this. The markets and the US economy are incredibly resilient. Despite the recent volatility, fundamentals generally look good, and the majority of sectors are well-positioned for long-term growth. This will not be without occasional bouts of volatility. But long-term diversified investors need not fear and will likely look back at this period of uncertainty as a long-term buying opportunity.
We are grateful for our partnership with you.
Jim Worden is an Investment Advisor Representative of WCG Wealth Advisors, LLC, a Registered Investment Advisor doing business as The Wealth Consulting Group. He is not affiliated with LPL Financial, LLC.
Jim is also an Officer and Investment Advisor Representative of Straightway Financial, LLC, a Registered Investment Advisor. Through Straightway, Jim offers research and consulting services to Registered Investment Advisors and other financial services companies. WCG Wealth Advisors, LLC is a separate entity from Straightway Financial, LLC and its clients.
Content in this material is for general information only and not intended to provide specific advice or
recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed.
The economics forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Investing in stock includes the numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.
Investing involves risk including loss of principal. No strategy assures success or protects against loss.