Our Thoughts on Silicon Valley Bank

March 14, 2023

By Ellen Hazen, CFA®, Chief Market Strategist

The Investment Team would like to update you on our thoughts concerning recent events at Silicon Valley Bank and other banks.

As you may have seen, Silicon Valley Bank (SVB) was taken over by the Federal Deposit Insurance Corporation (FDIC) last Friday, after SVB clients withdrew more deposits than the bank could adequately fund. Signature Bank was taken over by the FDIC on Sunday for similar reasons. Over the weekend, regulators acted swiftly to ensure that depositors will be protected at both SVB and Signature Bank, providing liquidity in excess of the normal $250,000 FDIC insured limit. They also provided all eligible depository institutions with increased access to liquidity so that they and their depositors may be similarly protected.

What happened at SVB: In a nutshell, SVB’s customers (primarily startup companies) saw a large influx of cash over the past several years, which they deposited at SVB. SVB invested these customer deposits in long-term assets, such as Treasury bonds and mortgage bonds. As the Federal Reserve (Fed) raised interest rates over the past year, these startup companies started to withdraw their deposits. This created a liquidity crunch for SVB—bond prices move inversely to interest rates so if interest rates increase, bond prices will decline. The value of the bonds held on SVB’s balance sheet did just that, which left SVB unable to liquidate those holdings at prices that would have supported the cash needs of their clients.

The FDIC, the Fed, and the Treasury acted in concert to provide assurances that depositors will be able to access 100% of their deposits, and to allow all eligible depository institutions (any US federally insured depository institution that is eligible for primary credit under the Federal Reserve discount window – so most banks and credit unions) to take out a one-year loan, pledging as collateral Treasury bonds that might have declined in value, but which, if held to maturity, will pay in full at the bond’s issued face value. This means that other banks should be able to meet depositor withdrawals.

While trouble in the banking sector can be concerning, our Investment Team does not view this as a precursor to a 2008-like environment, for several reasons.

  • First, the entire banking system is much better capitalized – meaning it has less leverage – than it was in 2008, in part due to the tighter regulations that have been enacted since that time. These include higher capital requirements and more frequent regulatory testing.
  • Second, the regulators quickly and comprehensively addressed actual points of failure at SVB, and potential stress points for most banks, preventing more widespread repercussions from this event.
  • Third, credit quality across the banking spectrum is significantly stronger than it was in 2008, whether for individuals or for corporations.
  • Finally, SVB was somewhat unique in being particularly exposed to both accelerated withdrawals because of its concentrated client base, and to higher interest rates because of its much higher concentration in long-duration securities than other banks.

Our view on the public equity and fixed income markets is not materially different than it has been for the last several months. We believe that as the Fed continues to increase interest rates, volatility may remain higher than usual in all asset classes, and some business models that were predicated on zero or very low interest rates will be pressured. While the Fed may slow or pause its interest rate increases at the upcoming meetings over the next few months, as it responds to recent volatile market conditions, we note that inflation remains well above the Fed’s 2% target, which points toward the likelihood of continued Fed rate increases in the medium- to longer-term.

We are not making any significant changes to client investments at this time, although we continue to carefully examine all of our exposures. Our view on overall asset allocation remains a modest underweight in both equities and fixed income, with the balance held in cash and alternative investments.

We believe that all client assets held at their custodians are safe and do not anticipate any disruptions.

We will discuss current market conditions at more length in our next Quarterly Newsletter (published in early April), so please keep an eye out for that. As always, please reach to any member of your F.L.Putnam team with any questions or concerns. We are always happy to speak with you.


Disclosures

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