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The Spectacular Collapse of Silicon Valley Bank


We could forgive you for thinking that bank failures are a thing of the Great Depression, not something that would happen now. You'd be wrong, thanks to the highly publicized bankruptcy of a once-obscure institution called Silicon Valley Bank, which collapsed Friday and was taken over by federal regulators to protect the assets of its depositors. It was the largest US bank failure since the 2008 economic crisis. Is there cause for concern? Probably not, but there's a chance it could get worse.

First, we'll touch on "probably not"….

Silicon Valley Bank (SVB to insiders) was a bit unique in the banking industry. Unlike most banks that lend money to local consumers, small businesses, etc., SVB lent to a very exclusive group of companies: tech start-ups and venture-backed healthcare companies.

Over its 40-year history, the bank grew with the technology industry, eventually becoming one of America's 20 largest credit institutions just before its collapse, with $209 billion in total assets at the end of last year. Unfortunately, in addition to its loan portfolio, SVB also decided to speculate with about $21 billion of its assets in long-term bonds that, as most of us know, did not pay very high interest rates - an average of 1.79%. When interest rates doubled and then rose again, those bonds fell in value at just the wrong time: when venture capital firms identified their own deficits and called for money, they had with the SVB. The bank announced that it had sold much of its bond portfolio at a loss and at the same time proposed to sell $2.25 billion in new shares of the bank to cover those losses. Therefore, some venture capital firms decided it would be safer to pull their assets out of SVB, leading to a disastrous bank rush. The bank's share price went into freefall, losing 80% of its value in a few wild trading days and California regulators decided they had seen enough. Last Friday they decided to close the bank and place it under guardianship.

The Federal Deposit Insurance Corporation guarantees all deposits up to $250,000, which means most (if not all) regular people who bank with SVB will, in fact, be okay by Monday. Now we'll get into why we think there's an opportunity for more concern.

Some Silicon Valley companies may not be as lucky as the smaller bank clients. Roku has filed reports saying it had about $487 million parked with SVB, representing about 26% of its cash. Gaming company Roblox may have parked as much as $150 million at the bank. Rocket Lab USA reported that there was also at least $38 million in assets on hand. Those companies, and others, will have to wait to see if a buyer steps in and acquires SVB -- which it likely is, given that the bank has relationships with a coveted clientele. The alternative is a bankruptcy process that would likely yield pennies on the dollar.

News of an imminent takeover sent a wave of fear into the markets as investors wondered whether this could be a sign of widespread weakness in the banking sector. The shares of smaller and regional banks fell briefly and likely in the short term in their share prices. However, the uniqueness of SVB and its customer base suggests that this may be an isolated occurrence. Nevertheless, we will probably hear about a small number of other banks that may have overextended themselves with similar (ill-advised) investments in long-term, low-interest loans and were blindsided by the speed of rising interest rates. In addition, we are aware of some large investors who transferred hundreds of millions of dollars from smaller banks on Friday where they held deposits with larger banks. There is a chance that the rush on deposits will have a domino effect on other banks.

As you read this, analysts are also looking at whether any of the banks may have been pouring money from depositors into cryptocurrencies – whose trading markets went into still-unexplained turmoil on SVB news. Treasury Secretary Janet Yellen, who is investigating the whole mess, also called a meeting of regulators to carefully examine the soundness of the banking system. The most likely outcome is that the SVB mess is a healthy re-examination of risks and exposures, giving regulators time to fix hidden risks before they lead to more collapses.

The lesson from this is that you need to make sure your portfolio is well diversified. This is no problem for our clients. But if you're not a client, you'll want to be proactive about removing unnecessary risk from your investments. Also make sure you have a long-term plan for managing your assets. This will help you stay disciplined, so you don't make reactive, emotional mistakes.

If you need help, contact us today for a no-obligation conversation: hello@expatbeleggen.com