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Partners in Building Wealth

News & Notes — March 2023

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On Friday, March 10, 2023, Silicon Valley Bank failed which shocked investors and sent shares of most regional banks lower. It is not exactly clear what caused the collapse, but bank executives made what in hindsight appears to be a series of mistakes.

First, SVB invested excess deposit reserves in prior years when interest rates were very low. The New York times reports they averaged 1.79% on $21 billion dollars of bonds that were sold for a loss of $1.8 billion. Banks are permitted to price bonds that are intended to be held to maturity at cost, but once sold they report the capital gain or loss. It may have been an innocent, yet naïve sale, in order to invest in higher yielding investments and improve profitability. But this sizeable sale was perceived by some to be a red flag, indicating SVB needed to raise funds to shore up deposits that were leaving the bank for higher yielding bonds and money market funds.

Venture funds warned clients and their portfolio companies that the sizeable sale could be a problem and suggested they transfer uninsured funds elsewhere. What followed over the next few days was a classic “run on the bank” which was a surprise and sent the stock price of Silicon Valley Bank plummeting. Others, such as First Republic Bank, fell over 40% during the week. Very large banks, such as Bank of America and Wells Fargo also declined.

Was this the start of a financial crisis or an isolated event? It is likely the collapse of the bank could have been avoided if management had communicated this sale of “hold to maturity” bonds and explained their intent to increase the yield on their excess deposits. At this point, it appears this is an isolated event and not the start of widespread bank failures.

Silicon Valley Bank was a unique bank in that their customer base was not diversified. Most of their clients and depositors were in the technology sector. They also had a strong presence in the winery business, financing many of California’s successful wineries. Roku disclosed they have approximately $487 million held at Silicon Valley Bank which represents about 26% of their cash and cash reserves. These deposits are for the most part uninsured. It is unclear whether any of the depositors will recover funds over and above the insured limits. However, hedge funds are rumored to be offering to buy deposits for 60 cents on the dollar and the FDIC will give employees 45 days of work. The regulators will attempt to sell SVB’s other businesses.

This appears to be a unique situation and not the beginning of the next financial crisis. First Republic Bank filed a statement saying, “First Republic’s deposit base is strong and well-diversified.” They went on to say that no one sector represents more than 9% of total deposits. FRC’s liquidity position is strong. Less than 2% of their invested reserves are categorized as “hold to maturity”.

It is premature to ignore this failure and write it off to an insolated event. This saga will continue to play out over the next weeks and months as we learn more about what really happened. Bank deposits are paying very low interest – in some cases below 2% and money market funds and short-term Treasuries are yielding over 4%. It is likely depositors will continue to move funds. But this does not mean other banks will collapse.

The best advice in this situation is to maintain deposits at banks, especially small community and regional banks, at or below the $250,000 insured amount. The Silicon Valley Bank depositors with amounts in this range will be paid back shortly.