Weekly Market Commentary
The Fall of SVB was Remarkably Fast
Posted on March 14, 2023
|The Major Markets fell once again last week as the market dealt with the news of a bank run. All five indices fell substantially with the Nasdaq seeing the greatest losses. The S&P 500 was not far behind with a loss just over 4.5 percent. For investors, there was a sense of trepidation midweek as Jerome Powell testified before the Senate Banking Committee. In his statements, Powell said, “The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” and, “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”|
The comments saw the rate hike odds surge from a 68 percent probability of a 25-basis point increase at the March FOMC Meeting on Monday to Wednesday’s 78 percent projection of a 50-basis point increase.
However, everything changed Friday. By now, most casual market observers have heard the name of Silicon Valley Bank.
As others have highlighted, it is amazing how quickly the fall from grace took place. Just two weeks earlier, Forbes had highlighted the bank for the 5th year in a row as one of America’s Best Banks. While the original version of the post, complete with the bank sitting at number 20 on the list, can be found using the Wayback Machine, the version at the time of this video’s creation has the name removed along with a note acknowledging the collapse of the bank.
The fall of SVB was remarkably fast. While many might initially think of the 2008 financial crisis with this incident, the events were more like the scene out of the Christmas Favorite “It’s a Wonderful Life”.
In this bank’s case, the cause of the decline centered around liquidity. On March 8th, Moody’s, which is one of the top financial ratings agencies in the world, downgraded the ratings of the bank and its holding company due to “deterioration in the bank’s funding, liquidity and profitability, which prompted SVB to announce actions to restructure its balance sheet.”
Meanwhile, Peter Thiel, a Silicon Valley billionaire who made his wealth founding PayPal began to pull his assets from SVB immediately and alerted others to do the same. The stock fell 60 percent in after-hours trading and was halted Friday. Customers tried to withdrawal $42B in deposits within hours, draining the bank of all its liquid assets. California State Regulators as well as the FDIC then took possession of the bank.
The biggest issue that impacted SVB was not bad loans, like what led to the 2008 bailouts, but rather the ever-increasing interest rates caused by the Fed. SVB had $161B in customer deposits as of the end of last year according to regulatory filings. This fell modestly from the $175B at the prior year end of 2021. But still significantly higher than the $95B at the end of 2020 and the $56B back at the end of 2019.
But over that time period interest rates rose. SVB invested deposits into long term, low-risk government bonds, as well as other assets to pay for operations and provide returns. Ironically, it was the investment in low-risk bonds relative to the venture capital exposure that proved the greater issue in this case. As interest rates rose, the value of the bonds on the books fell. Moreover, the Silicon Valley tech companies that marked the niche for this bank began to pull more cash from their accounts than what they were putting in, draining overall liquidity from the bank as a whole. In the end, there were not enough liquid assets on hand to match the demand of the deposits, creating the run that we saw take place.
While the extent of the fallout is still unknown, the Fed has issued a number of statements. Over the weekend, the Fed issued a statement that additional funds would be made available. They also announced the creation of the Bank Term Funding Program, allowing banks and other eligible institutions a facility for additional sources of liquidity during periods of financial stress. And on Monday the 13th, the Fed announced that they would begin to investigate the bank that they oversaw.
By the close of the week, Treasuries fell in all durations beyond 1-year. This provided some positive performance in the bond market at a time when equities suffered.
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