Recent Bank Failure Summary
Bradley Prosper, CFA®, CFP® XPYRIA Team Insights
Three bank failures – all are one-offs. Signature Bank and Silvergate collapsed as they were crypto-related banks that experienced a bank-run. Depositors at Signature and Silvergate wanted to withdraw their money, but the bank owned illiquid crypto assets and were unable to meet redemptions. Silicon Valley Bank (SVB), the 16th largest bank in the U.S., failed. In short, this bank failed due to poor diversification of its depositor base and too much interest rate sensitivity in its fixed income portfolio. We do not believe this is systemic. The clear consensus among financial industry experts is that while shorter-term fears may roil some other regional banks, the Silicon Valley Bank failure is not a harbinger of another 2008-type financial crisis.
As interest rates have risen over the last 12 months, valuations of speculative companies (aka unprofitable companies, venture capital-backed companies, etc.) have cratered. As a result, venture capitalists have slowed their pace of investment, which left many VC-backed companies with few options for funding. These unprofitable, early-stage companies (often referred to as tech-driven start-up firms) were SVB’s target market and main depositor base. With these companies having no other options to fund their operations (e.g. payroll, day-to-day expenses, etc.), they began to pull money from their bank, SVB. SVB concentrated its deposit base in these companies, and these companies all needed capital at the same time, which led to a bank-run on SVB. As the requests for cash continued to climb, SVB was going to have to sell the fixed income securities on its balance sheet. Since rates rose so quickly over the last year, these fixed income securities are trading at discounts and would not have been enough to cover the withdrawal requests.
The government placed SVB into receivership over the weekend. In addition, the Federal Reserve created a new program called “Bank Term Funding Program.” The Bank Term Funding Program is a $25 billion program that was created to issue 1 year loans to banks so they don’t have to sell securities (Treasuries and Agency mortgage-backed securities) to meet withdrawal requests. This program is designed to provide stability and solvency to regional banks and the banking sector as a whole.
We had virtually no exposure to SVB or to its major depositors. The S&P 500 Index had a 0.04% weight in SVB at the beginning of the year, so the index also had very little exposure.
In addition, the interest rate hikes over the last year have created a difficult environment for some regional banks. As better cash management opportunities have arisen (money market funds are now yielding more than 4%), it simply doesn’t make sense for depositors to keep their money at a regional bank and earn 0.25% in interest. We’re monitoring this situation, but we have very little exposure to regional banks (1.08% of our equity exposure as of 12/31/22).
SVB was unique in its extreme reliance on venture capital-backed depositors rather than traditional retail deposits. SVB had poor risk management, which is why our active managers did not have any exposure to this bank or its major depositors. In conclusion, we are continuing to monitor the situation as it evolves, but this appears to be a one-off bank failure (of which we’ve seen hundreds).
Bank Failures in Brief – 2001 Through 2023
For any clients who would like to review their bank deposits and the FDIC limit, we encourage you to contact us. We can assess your individual banking situation and provide ideas on how best to position those deposits.
The situation involving Silicon Valley Bank is very new and still developing. We have worked hard to ensure we fully understand any ramifications that could impact our clients and will continue to do so in the days and weeks ahead. Please feel free to contact us with any questions or concerns.