Silicon Valley Bank (SVB) Commentary

bryan-taylor

Readers who have followed the financial news over the past few days have seen headlines about the collapse of Silicon Valley Bank (SVB).  We wanted to provide a brief commentary about what happened and address investor concerns about the safety of their capital or any fears that a repeat of the 2008 financial crisis is brewing.  We think a replay of the banking crisis brought about by over-leveraged banks peddling risky mortgage-backed securities remains unlikely.  Bank failures have happened in the past, and those failures have not always been connected with systemic problems in the banking system and the economy.  In the case of SVB, the vast bulk of the bank’s deposits were corporate in nature and were, therefore, less “sticky” than traditional investor deposits.  Further, SVB’s depositors were largely comprised of tech-related start-up companies highly dependent upon venture capital.  As rates have risen, money has become less accessible and such companies have had less access to easy capital.

In this environment, corporations have drawn down their reserves at a faster rate than expected and at the same time have sought to move funds to higher interest-bearing accounts.  It was this combination that resulted in pressure on SVB and other more corporately-focused banks in the area.  A broader banking crisis would certainly be a major challenge for markets and the economy, but most banks remain well capitalized, and major money center and investments banks are much healthier than they were during the Great Recession. 

Last night the Fed announced that depositors to both SVB and Signature Bank would have full access to all of their funds—including those above the insured limit—today.  They announced the opening of a unique lending facility, the Bank Term Funding Program (BTFP), to offer loans for up to a year to any federally insured depository institution.  Along with these actions, they have already begun the auction process to secure a buyer for these two banks.  The Fed’s discount window also remains open to facilitate lending.  While some of these actions may be unnecessary and one could argue that the Fed should not have gone quite as far as it has to negate the risk of a panic, these actions should help reassure investors and markets. 

As this situation relates to Cornerstone’s own clients, our primary custodian Schwab is well capitalized, diversified, and has a preponderance of small FDIC insured depositors.  Schwab noted that sweep cash outflows remain in line with normal behavior, and Schwab continues to add net new assets. Schwab also noted, “More than 80% of our total bank deposits fall within FDIC limits.”

Schwab has over $7 Trillion in client assets as of the end of February, and along with the positive flows indicated above, has significant additional liquidity lines available.  As noted previously, the banking system overall is in a significantly better position than in the 2008 crisis, and most major money center banks have capital ratios that are extremely healthy.  In summary, The Fed’s annual review and capital distribution restrictions have led to a well-capitalized and healthy banking system.

We should note that while we do not expect the SVB issue to lead to a broader banking crisis, we do believe that it is symptomatic of the challenges brought about by the Fed’s monetary tightening program.  The Fed continues to utilize monetary policy to address the inflationary pressures remaining in the economy.  These actions do not occur in a vacuum, and we expect continued volatility in equity and fixed income markets throughout 2023.  Consequently, we remain defensive in our positioning with shorter duration fixed income exposure, higher cash balances, and a broad tilt toward value-oriented securities in our portfolios.  We will continue to evaluate the rapidly changing economic environment and rely on both our policy driven framework and comprehensive diversification to provide protection during this period of heightened uncertainty. 

Bryan Taylor