Silicon Valley Bank: An Unfolding Story

(March 13, 2023) On Friday, Silicon Valley Bank (SVB) was seized by U.S. regulators after there was a run on the bank. This failure of the nation’s 16^th largest bank raises several issues we want to address.

First is the importance of limiting your bank deposits at any one bank below the FDIC insurance threshold ($250,000 per person for each account ownership category at any one institution). Initially, it was announced that only insured deposits at SVB would be available for withdrawal on Monday. The fate of uninsured deposits remained unknown until Sunday evening when the Federal Reserve announced that it had established a temporary lending facility collateralized by U.S. Treasury securities to support SVB. This action allows all deposits to be made available for withdrawal, even those not covered through FDIC insurance. The same liquidity facility was also extended to Signature Bank of New York, which was closed by regulators on Sunday.

This intervention and support from the Fed will come as a huge relief for those affected. That said, it’s a good reminder to re-evaluate your deposit exposure to banks – particularly smaller banks. As planners, we recommend being cognizant of the FDIC insurance thresholds and diversifying your cash holdings accordingly. Your Modera advisor can assist you with investing your excess cash in a U.S. Treasury money market fund at Fidelity or Schwab.

We also want to address concerns of what the collapse of SVB could signal on a macro level. Our belief is that the likelihood of a run on one of the major U.S. banks is minimal. Generally, U.S. banks are well-capitalized, and the banking system is strong. That being said, SVB and Signature aren’t the only vulnerable banks. First Republic has been in the news and might also be at risk. The Federal Reserve’s willingness to step in should be viewed positively, yet it would be a mistake to assume that it will do the same for every subsequent bank failure.

Why Silicon Valley Bank?

There are some characteristics of SVB that left it uniquely vulnerable to the current climate of rapidly rising interest rates. Before we explain, let’s review the basic business model of a bank.

Simply stated, banks take in deposits from people and businesses, then lend money to other people and businesses. They profit from the spread between the interest they pay depositors and the interest they earn on loans. Banks typically make money by taking credit risk – understanding borrowers and lending only to the ones who are likely to pay the money back. A diversified pool of borrowers insulates against the risk of concentrated credit risk with one type of borrower or industry.  A broadly diversified pool of depositors, with an emphasis on insured deposits, makes a bank run much less likely.

SVB focused on serving the tech industry, which led to a confluence of risks on both the borrower and depositor sides of the ledger. Because tech companies have been flush with cash from venture capital and frothy stock prices, they haven’t needed to borrow from banks to finance their operations. So, with limited ability to deploy the growing deposits in business loans, SVB purchased long-dated U.S. treasury bonds.

Every bank has some of this imbalance between deposits (which are, by definition, short-term) and long-term loans. However, according to Robert Armstrong at The Financial Times, few banks have as much of their assets in fixed-rate securities rather than floating rate loans. At SVB, he estimates that fixed rate securities were 56% of assets. Bank of America, by way of example, has 28% of its assets in fixed-rate securities. When rates rapidly rose, the value of these long-term treasury bonds declined. This wouldn’t have been a problem if SVB could have held all those treasury bonds until maturity, but when the withdrawals started, that was no longer possible.

On the depositor side of things, tech companies and their shareholders have been flush with cash and deposits at SVB have grown rapidly in recent years. On Friday, the FDIC said that the amount of uninsured deposits was “undetermined” but based on recent regulatory filings, it has been estimated that uninsured deposits might be 85-90% of total deposits. These tech folks all talk to one another, and concerns were being raised about the value of SVB’s investments. Prominent venture capitalists began advising their sponsored firms to withdraw from SVB, which precipitated the run on the bank.

What next?

This is a fast-moving situation. As of Sunday evening, the regulators are trying to orchestrate a rescue whereby SVB deposits and assets are acquired by a larger, stronger bank. The Fed says that no taxpayer dollars will be used to support the bank or its depositors. Using taxpayer money for a bail out might no sit well with everyone.  On the other hand, if uninsured deposits are not made whole, businesses across the country who bank with smaller local banks might decide it’s too risky to continue. This could trigger a wave of bank runs and a flight to size, with deposits flooding into the big money center banks.  No doubt, this was an important factor in the Fed’s decision to provide the temporary liquidity facility.

It’s hard to say where this goes from here. Undoubtedly, there are other banks with similar risks and until things become clearer, we advise caution with respect to uninsured deposits at banks other than the largest U.S. banks. We’ll be following the issues closely and, should there be additional fall-out that we believe could impact you, rest assured that we will be there with guidance and next steps. If you have any specific questions or concerns, please do not hesitate to reach out to your advisor.