March 15, 2023

Banking Volatility Update

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If you’ve been watching the news over the past week, you have likely seen a number of stories regarding the banking industry and some recent bank failures. While we remain confident this is a short-term, isolated event among some regional banks with specific niche exposures, we wanted to provide some insight into what’s been happening as you try to navigate through the barrage of headlines.

How did this start?
Last week Wednesday evening (March 8), Silicon Valley Bank (SVB) announced it needed to raise approximately $2.25 billion to firm-up its balance sheet after a larger than expected amount of customer withdrawals. SVB was a niche bank that specialized in backing venture capital firms, working with almost half of all venture capital companies in the US. After the news on Wednesday evening, many venture capitalists became wary of SVB’s stability, which caused a bank run where these customers withdrew over $40 billion on Thursday. This was the final blow, resulting in regulators taking over the bank by the end of the week.

What was the cause?
There were a handful of reasons SVB specifically failed. Due to its narrow exposure to venture capital companies, the bank was overly exposed to riskier start-up companies. This served the bank well in prior years when interest rates were low but became an issue as these companies have been needing to withdraw cash at a faster pace with rates on the rise. To meet higher withdrawal demands, the bank was forced to start selling its own investments it had made with client deposits – specifically treasury bonds. While this wouldn’t normally create an issue, bond prices experienced a historic drop last year as the Fed hiked interest rates, so the bank was selling their bonds at a significant loss which created a lack of capital. Furthermore, the bank had a higher-than-average exposure to longer-duration bonds than other banks, resulting in a lack of liquidity.

What happens to SVB clients?
The initial worry was SVB’s customers might not have access to all their funds. Since their customer base was largely made up of start-up companies, many accounts were above the FDIC insured limits. However, regulators stepped in quickly to create a backstop, ensuring all customers would have access to their funds, even those above the standard FDIC limits.

What does this mean for other banks?
On Sunday, regulators also shut down Signature Bank, another bank with very narrow niche exposure (it was specifically exposed to the cryptocurrency industry). Like SVB, Signature’s customers were made whole with the same assurances to access all their funds. This move was made to protect the broader banking system and economy, to remove systemic risk from the market. Outside of SVB and Signature Bank, there has been an increase in volatility for bank stocks, but most banks appear to remain healthy without the same risks as those mentioned above. Smaller regional banks have taken the brunt of the recent volatility while the larger national banks have been less impacted.

How does this stack up to 2008?
Early indications show this isn’t stacking up to become another 2008 financial crisis meltdown. The two failed banks were unique with their risk exposures and circumstances, and most experts don’t expect this to impact the broader banking sector. Since the 2008 crisis, regulators have been more stringent on banks, so many are healthier and more stable than 15 years ago. Smaller regional banks don’t quite have the same regulatory requirements as larger banks, which allowed SVB and Signature Bank to skew their risk profiles more than appropriate, but these seem to be more isolated in nature as most regional banks are more widely diversified.

What can we expect going forward?
After a relief rally yesterday, this morning it was announced that Credit Suisse’s largest shareholder (Saudi National Bank) could no longer provide any support. While this sounds scary on the surface, there is more to the story than the headline. Saudi National holds 9.88% of Credit Suisse. If they go over 10%, it can create regulatory issues and headaches. A spokesperson for Saudi National added they are happy with Credit Suisse’s transformation and doesn’t believe they would require any extra capital to meet liquidity needs.

Nonetheless, the news spooked investors who had already been wary of the past week’s events in the banking sector, resulting in some further downward pressure and volatility. Looking ahead, it appears this won’t be a major long-lasting issue. Interestingly enough, this could even be a catalyst for smoother markets in the longer-term. It’s entirely possible this disruption causes the Fed to back off their path of interest rate hikes sooner than expected. If that winds up being the case (which isn’t guaranteed, but is a distinct possibility), markets could receive some relief with a lower peak rate from this hiking cycle. 

However, in the near-term it’s not unreasonable to expect some volatility in the markets until the uncertainty passes. Sometimes emotions take markets lower (or higher) than what’s rational. If this happens, you could expect to see some shifts in your accounts to take a little risk off the table in the near-term until markets settle down. Taking an emotion-free approach to investment decision making can take the guesswork out of the equation, providing guidance and direction regardless of market conditions.


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