Implications of Silicon Valley Bank Closure for Investors

As an investor, you are likely focused on the implications from the decision of the FDIC to put Silicon Valley Bank (SVB) into receivership.  On Friday, SVB was taken over by federal regulators in order to protect the assets of its depositors. Additionally, Signature Bank, one of the main banks for cryptocurrency companies, was closed by regulators on Sunday. In an attempt to avoid a depositor panic, officials took the step of designating SVB and Signature Bank as systemic risks to the financial system. This gave regulators flexibility to guarantee uninsured deposits over $250,000.

President Biden reassured investors Monday morning with comments outlining the administration’s response to the crisis. Central to the comments were that all deposits will be covered, taxpayers will not be harmed, and investigations will focus on finding the source of the crisis to further strengthen current banking regulations.

At the same time, the Federal Reserve introduced the Bank Term Funding Program (“BTFP”), which allows banks and other depository institutions to pledge U.S. treasuries, agency mortgage-backed securities, and other qualifying assets — at par value — in exchange for a loan with maturities of up to one year. This liquidity source essentially eliminates the need for banks to sell high-quality securities at a loss to meet deposit withdrawal shortfalls.  The Fed also indicated that it stands ready to address any liquidity pressures that may arise.

Silicon Valley Bank was unique in the banking industry. 

Unlike most banks that loan money to local residents, small businesses, and corporations, SVB lent to a very exclusive group of companies: tech startups and venture-backed health care companies.  Over its 40-year existence, the bank grew with the tech industry, eventually becoming one of America’s 20 largest lending institutions, with $209 billion in total assets shortly before its collapse.

SVB invested roughly $21 billion of its assets in long-term bonds, which at the time were paying very low rates.  When interest rates rose rapidly, the value of these bonds fell sharply. At the same time, venture capital firms were experiencing their own shortfalls and were drawing down funds they held at SVB. To raise cash for withdrawals, the bank sold a big part of its bond portfolio at a loss. To raise more capital, SVB announced its intent to sell $2.25 billion in new shares of the bank in order to cover those losses. As the news spread, SVB customers began withdrawing all deposits and a classic run on the bank began.

Signature Bank and Crypto

While Signature Bank experienced a similar rush to withdraw deposits, the underlying cause stemmed from a bet on crypto banking that went bad after the sector imploded and banking regulators cracked down on the bank’s exposure to digital assets. The events have sent investors and analysts rushing to audit the rest of the banking industry for more potential problems.

Market Volatility in the Banking Industry

Failure to address contagion risks this weekend would have likely led to a continuation of the volatility. As of Monday mid-morning, market volatility was confined to the banking sector. Interest rates have fallen considerably as investors seek a safe haven. Volatility has jumped and will likely stay elevated as investors sort through ongoing news reports.

As always, reach out to your advisors if you have further questions.

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