Silicon Valley Bank: A Perspective
We’re following the story of the failure of Silicon Valley Bank on Friday March 10. While this is the largest bank failure since 2008, it’s not that unusual for a regional bank to fail. Between 2016-2020 there were 16 bank failures, half of which occurred prior to the pandemic. SVB was a large player in its sector, with assets at the end of 2023 just over $2 billion, but it’s still small compared with a large bank like JP Morgan Chase with $3 trillion in assets.
There is an ongoing investigation into the reasons for SVB’s failure, but at the moment it appears that their problems arose from their failure to diversify both their client base and their assets. SVB management made a decision to specialize in tech start-ups, and then made a bet on interest rates staying low. When rates rose, they lost that bet.
Most banks can adapt to higher interest rates by charging more for loans, but since SVB’s clients were mainly start-ups with plenty of venture capital-provided cash and therefore little need for loans, the bank had more deposits than loans. SVB’s directors invested their funds in long-term treasury bonds because they pay higher interest, and that was good for SVB’s earnings. However, long-term bonds also decline more in value than shorter-term bonds when interest rates go up. When rates rose rapidly over the last year, it both increased the payments SVB must pay on deposits and it caused their asset base to decline just as more depositors were withdrawing assets, which meant the bank had to sell assets at a loss to meet the demand for withdrawals. Other investors became worried about the bank and started pulling their money out, creating a run on the bank’s resources that couldn’t be sustained, so the FDIC stepped in.
Normally the FDIC covers bank deposits up to $250k, but in this case Treasury Secretary Janet Yellen, along with Fed Chair Jerome Powell and FDIC chair Martin Gruenberg, announced that the FDIC will fully protect all SVB deposits. Investors would have access to all their funds as of March 13. Losses to the Deposit Insurance Fund will be covered by a special assessment on banks. Yellen, Powell and Gruenberg appear to be concerned about avoiding a panic that could spread to other banks, and at the same time want to make it clear that they are not using taxpayer money to prop up a poorly managed bank.
What does all this mean for you? If you’re not a stockholder or unsecured bondholder of SVB, you should be fine. Those investors are not protected in the way that depositors are. This situation does give us all reason to pause and reflect on some basic rules of investing.
First, there is always risk with any investment. We can mitigate and manage risk, but we can’t eliminate it.
Second, we should take care to diversify our assets, income streams, and every aspect of our financial life that we can, in order to avoid significant losses. We should not place bets on anything, certainly not on something as difficult to predict as the trajectory of interest rates.
Third, when holding cash, we should be mindful of the FDIC limit of $250k per depositor, per insured bank, for each account ownership category. That is, if you have $250k each in an individual account, a joint account, a trust account and an IRA, all would be protected.
It’s worth noting that our custodian, Shareholders’ Service Group, spreads your cash holdings among multiple banks to keep it under the FDIC limit.
We will continue to monitor the banking sector and keep you posted.
