Banking Headlines

Banking Headlines

March 15, 2023

Given the headlines and news coverage surrounding the sudden collapse of Silicon Valley Bank (SVB) late last week (as well as two other crypto-centric banks) we want to provide some perspective on the matter.

We believe SVB to be unique in that its customer base is heavy in startup companies and venture-capital firms.  These firms generated and deposited significant cash over the past few years, and SVB invested these deposits in longer term US Treasuries and government-backed mortgage securities. 

With the tech industry struggling and layoffs numbering in the tens of thousands, deposits turned to outflows and SVB had a mismatch between their short term needs and long term investments.  Too many depositors wanted their money back ($42 billion in withdrawals last Thursday alone), which forced liquidation of long term securities at unattractive prices, which led to a capital issue, which led to a credit risk issue.  

The government acted in response to the quickly developing situation in the form of protecting depositors and ensuring bank liquidity via the Bank Term Funding Program, helping calm markets and avoid further runs on banks to limit potential contagion.  

There's an expression that the Fed hikes rates until something breaks.  Something broke last week, and the resulting change in interest rate expectations going forward is quite dramatic.  Where there had been anticipation for a re-acceleration of rate hikes by the Fed next week, rates have aggressively changed with expectations of a more modest 0.25% hike or even a potential pause in hikes and potential rate cuts by year end.   Schwab's Chief Fixed Income Strategist summarizes things quite well here.

We realize the Global Financial Crisis, with its too-big-to-fail drama and big-bank failures remains seared in our collective memory; and with the COVID shock close in the rear view mirror, it's understandable people are a bit jittery.

As always, we believe it important to remain focused on long-term goals and not let short-term swings in the market derail discipline toward longer-term objectives.  If you have any questions or wish to discuss your particular circumstances, please be in touch, as we are here to serve.