Columbus Wealth Management
Silicon Valley Bank Collapse
Recent events in the banking system have drawn significant media attention and have contributed to market volatility. We recognize the stress this can cause for investors and want to provide clients with our viewpoint and planned actions to help alleviate any concerns.
First, it’s worth pointing out that while these events have had significant short-term impacts on the share prices of individual companies (particularly small-midsize banks), broader indices have fared much better. For the week ending March 10th, 2023, the S&P 500 declined about 4.6%. We then saw a 1% gain on Monday, and a 0.66% gain on Tuesday. Bonds (as measured by the Bloomberg US Aggregate index) have gained about 1.2% since March 6th. A typical portfolio of 60% Equities and 40% bonds has returned about +2.5% year-to-date (through March 13th).
For those interested, we also would like to provide our thoughts on the SIVB incident:
SIVB grew to the 16th largest bank in the U.S. with assets of around $209 Billion as of December 31, 2022. Their growth was in large part due to their focus on catering to startups in the tech sector which excelled during the pandemic. This growth happened over a very short period, with assets nearly doubling from the 2019 figure of about $115B. However, rising interest rates have hurt technology companies who funded a lot of their growth with cheap capital (often in the form of variable-rate debt). Once the Fed started increasing rates, these firms suffered and needed to pull deposits faster than banks like SIVB expected.
Banks earn profits mainly by taking in deposits, and then either lending them back out OR by investing them at higher rates than they agree to pay to their depositors. In the case of SIVB, they took in deposits at such a rapid rate that they couldn’t possibly complete due diligence on new lending opportunities quickly enough to loan out all the deposits they had taken in, so they invested the difference, primarily in U.S. Treasuries. With the aggressive rate hikes by the Federal reserve over the last 12 months or so, the value of SIVB’s bond portfolio declined significantly (values of bonds decline when interest rates increase). While it’s true that there is no credit risk with U.S. Treasuries, there is certainly duration risk, as we’ve seen across fixed income sectors during this rising interest rate environment. The combination of deposit outflows and rapidly declining values on the bank’s assets proved problematic for their balance sheet.
When depositors started to realize that the value of SIVB’s assets had significantly declined, they began withdrawing their money, fearing that SIVB’s assets may not be sufficient to cover withdrawals in the future. Customers of SIVB tried to withdraw $42 billion in deposits on Thursday, March 9 alone, which represented nearly a quarter of the bank’s deposits. This resulted in a “run on the bank”, and the Federal Deposit Insurance Corporation (FDIC) was forced to step in to shut down the bank’s operations.
What’s Being Done Now
Subsequently, regulators made promises that depositors would be made whole and would have full access to their cash on Monday morning. The Federal Reserve has also created a Bank Term Funding Program (BTFP), which will allow banks to borrow funds based on the face value of their collateral (rather than the current market value). This is significant in the current fixed income environment as it prevents banks from having to sell fixed income positions at a big loss. These two actions should significantly limit the fallout from the SIVB and Signature Bank failures. This is NOT the same as the 2008 crisis, which was a much more widespread issue of bad loans being made to people who couldn’t afford to repay them. What we are seeing here is a much more isolated case related to the fast growth of select banks during a rising interest rate environment and a lack of diversity in their investments. Most banks, especially the largest ones, have a far more diversified investment portfolio and are better able to weather the storm of rising rates.
Impacts to You
Investors are still keeping a close watch on the Federal Reserve as their plan to deal with inflation continues to unfold. Inflation is beginning to moderate, but it’s yet to be seen how far the Fed will take rates. Additionally, they now must consider other issues like the SIVB failure. Fortunately, while regulators tend to struggle with implementing policy that will result in a desired economic outcome (as with interest rate policy and inflation), they do tend to be very effective at quickly stepping in and resolving issues like the SIVB failure. We still run the risk of a recession but continue to believe it will be mild compared to past cycles with high overall strength in our financial system and a labor market that continues to show resilience.
As for your bank accounts, we recommend you review your checking and savings account balances to ensure you don’t have deposits exceeding the FDIC limits of $250,000 per account holder. This is something we review with clients periodically anyway (if they have given us access to their bank balances).
Your Schwab accounts with CWM are protected by SIPC (Securities Investor Protection Corporation), and Schwab provides additional coverage in excess of the SIPC limits. Read more details HERE. For clients with money market positions like Schwab Value Advantage (SWVXX), these are securities rather than bank products and are NOT FDIC insured, but we continue to have confidence that these positions are well managed and continue to recommend them for excess cash balances.
You may also have heard about the sudden drop in Charles Schwab & Co., Inc. (SCHW) share price, which opened on Monday, March 13th over 21% lower. As with most crises, this results in large part from a fear of contagion, or the worry that events like the SIVB and Signature Bank failures will cause a ripple effect throughout their industry and related industries. The fear is magnified if other institutions have any exposure to the failed institutions, or if their portfolios are invested in a similar fashion. In the case of Schwab, they are a far larger and more established institution with a very diversified portfolio and much better access to liquidity and borrowing options. Schwab’s share price has since posted a significant recovery. Read more about Schwab’s response to recent events HERE.
Panic is not a sound investment strategy! Many investors will feel they should leave the market when things get scary and will want to get back in when things feel comfortable again. This is a great recipe for buying high and selling low, which is the opposite of what we want to do. Efforts to time markets don’t prevail in the long run; we are far better off to stay disciplined and follow the plan we originally agreed to on your Investment Policy Statement. We remain available to discuss your questions and concerns at any time.
Your Columbus Wealth Management Team