On Friday, Federal banking regulators placed Silicon Valley Bank (SIVB) into receivership to protect depositors and to prevent possible contagion from spreading through the financial system.  SIVB was the second largest commercial bank failure in U.S. history (behind Washington Mutual, which failed in 2008).

What Happened?

Last week, SIVB announced it had sold $21 billion of U.S. Treasurys from its portfolio and realized a $2 billion loss.  It also said it was moving to raise fresh capital after disclosing that its deposit base was shrinking at a faster-than-expected pace.  Investors and depositors alike suddenly lost confidence in the bank and began selling their shares and yanking their deposits.  A classic bank run ensued, sealing SIVB’s fate.

SIVB Had Unique Vulnerabilities

SIVB had a host of unique vulnerabilities which are not present in the broader banking system.  First, it had a very high concentration of venture capital-backed start-ups and tech founders among its customers, leading to a herd mentality once confidence began to crack.  Second, it held a large amount of long-dated, lower-yielding U.S. Treasury and agency bonds in its portfolio that were vulnerable to a sharp decline in value as interest rates increased.  Finally, SIVB’s ratio of securities to deposits was much higher than at other banks.  All these factors contributed to SIVB’s precarious position, and, for reasons yet to be uncovered, regulators did not move earlier to address the company’s weaknesses.  In our view, SIVB’s failure shows that stronger regulations for the banks are necessary, but largely this was a disaster of SIVB management’s own making.

Implications for the Broader Market

The broad equity markets took the weekend’s developments well in stride.  The banking sector, particularly the regional banks, did see significant losses, however.  There are bound to be plenty of knock-on effects from this episode, but it is too early to speculate what form they will take.  Stocks, particularly technology stocks, held their own in Monday’s trading session, perhaps indicating that investors may be expecting this banking crisis to slow (or stop) the Fed’s interest rate hiking campaign.  We expect these developments to have a dampening effect on the overall economy in the coming weeks as businesses and consumers alike focus more on safety and risk management.

As always, we are closely monitoring developments in the markets and in our client portfolios.  Please let us know if there is anything you would like to discuss.