By Brian O’Neill CFP®
Friday (3/10/2023) saw the precipitous collapse of Silicon Valley Bank (SVB), making it the second largest US bank failure, only topped by that of Washington Mutual at the peak of the 2008/2009 financial crisis. On Sunday (3/12/2023), New York-based Signature Bank followed suit, marking the third largest US bank failure in history. This obviously led to questions about the health of the US financial industry, and worries about echoes from that turbulent time. With nerves understandably on edge, we thought it would be a good time to share some calming thoughts.
On Sunday evening, the Treasury Department, Federal Reserve, and FDIC issued a joint statement laying out decisive actions that will be taken to strengthen confidence in the banking system. In short, all depositors at these banks will be made whole, even those who maintained accounts larger than the FDIC insurable limit of $250,000. While these emergency measures were necessary for depositor protection and for companies to make payroll this week, shareholders and unsecured debt holders of these banks will not be bailed out.
The Fall of SVB
Primarily, the failure of SVB was specific to both the clientele of the bank, and what can only be termed loose risk controls that management put in place. SVB served the start-up community and venture capital backed companies, mostly in the San Francisco region. The bank’s deposits ballooned during the pandemic, as new money from Initial Public Offerings and Special Purpose Acquisition Vehicles soared. The bank then chose to invest the proceeds of these significant deposits into long-dated US Treasuries, rather than choosing to make riskier loans. While that feels safe, the reality of long-dated bonds is that when interest rates rose in 2022, the value of these bonds fell, and in some cases, fell dramatically.
Even in the backdrop of falling bond prices, the bank remained solvent, as most of their customers were required to continue to bank with them. This meant deposits remained…until last week. As the economy has softened, many of these startup companies began withdrawing cash to sustain operations – easy money was no longer available, and they had to use their funds in the bank. This initially forced SVB to sell some of these “safe” securities they had purchased, and in their 8-K filing on March 8th, they disclosed they did this at a loss of $1.8 billion. With this 8-K filing, an old fashioned bank run started, and within 3 days, the bank was insolvent, and taken over by the FDIC.
Longer Term Implications
Should we worry about other banks? Our belief is that this is fairly focused on SVB and Signature, and possibly other smaller banks intertwined with the startup and crypto communities. Most banks do not have deposits that are significantly over these FDIC insured limits, as most banks work with individual clients like you and me. Additionally, bank regulators placed much more significant controls on capital and lending requirements. While it appears regulators missed the specific issues at SVB, the overall banking system in America is much healthier than it was prior to 2008/2009, and we do not believe these issues exist on most bank balance sheets.
We will need to monitor the fallout of these failures, so this story is not completely told, but we see no reason to hit any panic buttons due to our financial system.
As always, we welcome any questions.
Brian O’Neill, CFP®, is president and a financial advisor in the Atlanta office of Cahaba Wealth Management, www.cahabawealth.com.
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