Financial markets were shaken last week as Silicon Valley Bank (SVB), the California bank subsidiary of SVB Financial Group (SIVB), fell into FDIC receivership. SVB is the first FDIC-insured institution to fail since 2020 and the largest by assets since Washington Mutual failed in 2008. Prior to the latest distress, the bank held more than $200 billion in assets. SVB’s failure was then followed by another over the weekend, crypto-focused Signature Bank. The news, not surprisingly, caused market participants to speculate if there will be another shoe to drop. For some, these developments have brought back painful memories of the financial crisis 15 years ago.
On Sunday night, we were informed that the U.S. government would help prevent the spread of financial risk by allowing SVB customers to access their uninsured deposits. The Federal Reserve and U.S. Treasury Department designated SVB as a risk to the banking system, which allows emergency lending authority to prevent runs on other banks. The main goal was to prevent runs on small and mid-sized banks not monitored by the Fed. The Fed Board of Governors will hold a special meeting today at 11:30am ET.
However, there was more to the story. SVB had issues with its customer base as they mostly consisted of early-stage venture capital customers, making their deposit base less stable. Many of these startup companies had been using up a lot of cash and had limited funding options. Additionally, SVB mismanaged their balance sheet by having a heavy exposure to interest rate sensitive Treasury and government securities without enough interest rate hedging activities. This left the bank vulnerable to a run when it was known to be facing solvency issues. The federal backstop has limited the spillover, and the Fed may slow its rate hiking campaign to restore confidence in banks.
So what should investors do? Some caution is warranted as sentiment around the banking system remains fragile. But we believe tactical investors should maintain multi-asset allocations at or near benchmark levels. And don’t lose sight of opportunities to potentially add risk after the SVB distress passes. Conditions will improve before long, in our view. For longer-term, strategic investors with well-balanced allocations, we would not make any changes at this point.
In closing, SIVB’s niche clientele and its balance sheet mismanagement were distinctive contributors of the bank’s downfall. Meanwhile, the government’s actions to backstop deposits and provide short-term funding to banks that need it, greatly reduce the odds of a systemic crisis. We may see a bit more market volatility than we would like to see in the short term, but this is not another 2008.