Silicon Valley Bank (SVB), the 16th largest U.S. bank by assets, was forced into FDIC receivership on Friday, March 10, 2023, after a classic run on bank deposits following concerns about investment losses and its inability to raise capital. Two other banks also failed in the last few days. A common thread among these banks is their focus on technology, an industry that has slowed recently, or cryptocurrencies, which have also experienced recent volatility. Over the weekend, the Federal Reserve (Fed), Treasury Department, and FDIC jointly announced a new backstop for the entire banking system to address the underlying issues and protect all depositors.
Generally, banks fail when they lack the funds to cover their customers’ deposits and the debt they owe to others. Bank failures are not uncommon as typically a few happen each year. However, we have experienced a long stretch of stability and have not seen a bank failure since 2020.
The story of the SVB collapse highlights the effects of rapidly rising interest rates, bond security losses, as well as close ties to Silicon Valley venture capital and private equity. The quick increase in interest rates last year created bond losses for the bank. SVB recently sold $21 billion in bond securities and booked a loss of $1.8 billion. Additional unrealized bond securities losses remain on their balance sheet. To offset these losses, SVB intended to raise additional capital.
This mismatch between the longer-maturity investment securities compared with the short-term nature of bank deposits raised concerns with depositors. Last week reports surfaced that several venture capital firms encouraged their portfolio companies to withdraw deposits from the SVB. This lack of confidence created a run on bank deposits and regulators shut down the bank before the outflow of deposits became too large and would have led to additional bond sales and losses.
To stem a possible contagion throughout the banking system, regulators announced that the FDIC would insure all deposits and provide a temporary program for banks to strengthen their securities portfolios. Today’s banking issue appears different from the 2008/2009 period, which was related to asset quality. In fact, because of that previous episode, the banking industry has become better capitalized. Of course, the current concern highlights the stress that rising interest rates can impose on certain industries, especially banks, and the need to stay alert for other possible cracks in the foundation. The effect of the Fed’s rapid rise in interest rates is becoming clear and likely will continue.
Events like these can cause anxiety and fear. However, it is important to take a step back and remember that these events aren’t as out-of-the-ordinary as they seem. Bank failures do occur from time-to-time, so it’s important to deposit your money at an FDIC bank and ensure you’re within FDIC insurance limits and guidelines. It is also comforting to know that no depositor has lost any FDIC-insured funds since 1933.
There are also steps you can take to protect your funds.
- Avoid concentration of assets by maintaining a diversified portfolio.
- Stay vigilant and monitor your accounts for suspicious activity.
- Be wary of unusual activity as events like these often allow hackers an opportunity to impersonate others and send falsified invoices or account change forms that direct funds to attacker-controlled accounts.
- Watch for potentially harmful emails that may come to your inbox and do not open them or click on any links provided.
The rapid failure of SVB resulted from a dramatic rise in rates and a slowdown in the technology industry. Although SVB may have a unique business model in many respects, all banks are subject to rate changes and a lack of confidence that can lead to a bank run. We feel optimistic that the overall positive health of the banking system, along with excess savings and the government’s swift response to this crisis should help halt contagion in the near term. However, as policymakers continue to grapple with inflation, investors should brace for other possible cracks in the system that may result as a necessary by-product of policy action.
Our investment team and advisors will continue to monitor this situation, the markets, and the economy. If you have additional questions, please reach out to your Ronald Blue Trust advisor or contact us at 800.987.2987 or email [email protected].