Confidence in banking is falling. The Silicon Valley Bank (“SIVB”) failure ignited a host of old fears as well as new ones. U.S. consumers have nearly the same fear level of concern about banking as they did during the 2008 financial crisis. According to a Gallup poll, when asked about “the safety of money you have deposited in banks and other financial institutions”:
- 19% of Americans were “Very worried”
- 29% of Americans were “Moderately worried”
- 30% of Americans were “Not too worried”
- 20% of Americans were “Not worried at all”
- And only ~2% of Americans had no opinion
For comparison purposes, in September of 2008, fresh from the Lehman Brothers collapse (also the largest bankruptcy filing in U.S. history), consumer concern was 45% either very or moderately worried about the safety of their money. Even after Congress bailed out at-risk banks with TARP (Troubled Assets Relief Program), 41% of U.S. consumers surveyed said they were still very or moderately worried.
Why did Silicon Valley Bank Fail?
Silicon Valley Bank failed on March 10, 2023. SVB failed because they ignored tried and proven long-term investing cardinal rules: Diversification and Risk Management. Despite its impressive growth and $209 Billion Asset base in 2022, according to the FDIC (Federal Deposit Insurance Corporation), its specialization in venture capital-backed startup tech companies became a proverbial double-edged sword. Non-diversification: SVB invested outsized amounts of their deposits in long-term U.S. Treasuries and MBS (mortgage-backed securities). Smart play if interest rates stayed low -which they did for years. However, it was an inherently risky play, because interest rates historically are prone to changes and sharp ones at that. When interest rates inexorably rose again, the bank’s bond portfolio started taking losses. Interestingly, SVB would have recovered its capital if different circumstances allowed them to hold their bonds through maturity.
Relaxed Risk Management
In 2021, Silicon Valley Bank moved to longer-term securities to increase their yield, but did not adequately protect the downside risk with shorter-term investments for near-term liquidations. This imbalance made SVB effectively insolvent because they were no longer able to offload their assets without incurring significant losses.
After the Federal Reserve began raising interest rates, moving the federal funds rate aggressively higher from 0.25% to 0.50% (March 17, 2022) to 5.25% to 5.50% (July 26, 2023), many bank customers began taking their money out as Venture Capital began shriveling up -causing a painful chain reaction. SVB was then forced to sell their originally profitable bond positions at significant losses. Next, news of these losses stoked embers for investors to panic. Then, the news was very quickly disseminated amongst SVB’s very tech-saavy client base -turning panic into an outright fear stampede.
A Good ‘ol fashioned Bank Run meets 2023 Technology
On March 8, 2023, SVB announced it was raising $2 Billion in capital because of a $1.8 Billion loss incurred after selling a bond portfolio. Then SVB CEO, Greg Becker attempted to allay fears by stating that SVB had the “financial position to weather sustained market pressures,” but noted that customer deposits were lower than expected in February. Not convinced, the credit ratings firm, Moody’s downgraded the bank’s bond rating and slashed its outlook to negative, from stable.
Now publicly short on capital, news of Silicon Valley Bank’s illiquidity problems spread like a wildfire through a dry forest in summer via social media platforms. SVB customers began withdrawing their capital through every possible method -especially digitally. The speed and ferocity of the withdrawals amplified by social media expletives. Axios found that negative tweets have a negative effect on bank returns, especially if those tweets originated from a startup leader. Further, “the intensity of Twitter conversation[s] about a bank predicts stock market losses.” SVB’s stock price imploded by ~60% on March 9 -less than 24 hours from the capital raising declaration. According to the Federal Reserve Board, SVB deposit outflows were over $40 Billion.
On March 10, Silicon Valley Bank, once the darling of Silicon Valley’s Tech community, failed. The CDFPI (California Department of Financial Protection and Innovation) shuttered the bank after the unprecedented deposit outflow. The FDIC was named receiver of the U.S.’s 16th largest bank and it became the largest bank crash since the Great Financial Crisis.
Reverberation and the Future of Banking
The shockwave of SVB’s failure immediately affected other banks such as First Republic, Signature Bank and Western Alliance. Similarities, again go back to non-diversification and risk management errors. The KBW Bank and Regional Bank indices, down ~20% YTD, are seriously lagging behind the S&P 500 up ~16% YTD. Conversely, as panic ensued at SVB and Signature Bank, megabanks like J.P. Morgan got bigger through both deposit inflows and stock price -as customers and investors sought refuge from any lesser-sized-bank instability.
Banks may be treated more like a customized and diversified portfolio in the future. Where customers no longer hold all of their assets at one single financial institution for added risk management and diversification. The number of FDIC-insured commercial banks was about 14,400 in the early 80s and now numbers 4,136 in 2022, according to the FDIC. This downtrend is likely to continue as U.S. still boasts the highest number of banks in the world and as consumers gravitate towards frictionless banking -where physical location is no longer the primary driver. Further, digital banking and social media will continue to be bigger parts of consumers’ lives -which will exaggerate any future panic at any other bank -real or perceived. In other words, competition is heating up, but is now skewed to large- and mega-sized financial institutions.
The SVB collapse punctuates the importance of strong portfolio management inclusive of robust risk management and personalized diversification. This means managing risk not only in bad times, but also in times of plenty.
Sources
Gallup - About Half in U.S. Worry About Their Money's Safety in Banks
Forbes - Federal Funds Rate History 1990 to 2023
The New York Times - 10 Days That Have Roiled Markets: A Timeline of the Banking Chaos
Axios - Twitter fueled run on Silicon Valley Bank, new paper finds
Federal Reserve - Re: Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley
Finextra - The value of frictionless banking
