Last week’s dramatic collapse of Silicon Valley Bank (SVB) caused headlines around the world. What caused this bank to go insolvent and how widespread will the fallout be?
The bank was part of the wider SVB Financial Group, whose share price was as high as $733 in Jan 2022, however on Friday 9th March the share price closed at $106.
Before we move onto the consequences, let’s examine briefly what happened and why…
Up until the beginning of 2022, US interest rates had been at an historical low and close to zero rates for some time. Banks with surplus cash deposits, needed somewhere to park this cash. The best yielding investments were US bonds with long dated maturities.
When the US Federal reserve began raising interest rates in March 2022, they did so aggressively. This had the causal effect of dropping the market value of long dated US bonds. When interest rates rise, newly issued bonds start paying higher interest rates to investors, which makes the older bonds with lower interest rates less attractive and less valuable. The result is that most banks have some quantum of unrealized losses on their books.
The large tier one US banks such JP Morgan, Goldman Sachs, Citigroup etc are all in good financial condition and far better capitalized than during the 08/09 financial crisis. They will be able to weather the storm and not be forced to realize the losses on their long-dated bond holdings. As of 30 September 2022 there were 4,746 commercial banks in the USA, many of them small to medium boutique banks such as SVB. These smaller boutique banks could find themselves facing short term liquidity issues.
This factor has forced the US financial regulators to step in to restore confidence to the country’s banking system. In a joint statement, US Treasury Secretary Janet Yellen and Fed Reserve Chairman Jerome Powell said the FDIC will stand behind the deposits of SVB and other smaller banks in a similar position. In a similar move, it has been announced in the UK that HSBC has bought the UK operations of SVB and will guarantee the UK subsidiaries deposits.
The steps taken illustrate the firm commitment of the US financial regulators to restore confidence in the US banking sector and protect depositors, whilst not bailing out equity investors. It is our considered view that the large cap US banks remain well capitalized with strong business models and are not in any imminent danger. The US Treasury and Federal Reserve need to be commended for acting quickly and decisively to restore confidence and stability to the US banking and financial sector.
- Always understand and take cognizance of the concept of “risk” when making investments.
- Take professional advice when managing your investment portfolio.
- Diversify your portfolio.
- There is no such thing as a sure thing!
The Activ8 Advisory team welcome the opportunity to meet with concerned investors to give further context and explanation to these events and the current investment climate.
