Given the news headlines surrounding Silicon Valley Bank (SVB), I want to provide you with a market update. Of course, volatile times in the market are often the worst times to make changes, so I don’t recommend any action. Nevertheless, the recent news has been quite complex, so I’ll do my best to update you on recent developments.

First, how did the bank collapse?

Silicon Valley Bank was doing well in the tech boom. It enjoyed a considerable deposit increase following Covid as the tech sector boomed, mostly from prominent venture capital businesses. The money held on deposit with SVB tripled between 2019 and 2021. The bank had to put this money to work.

The deposits became sizeable, so they invested a significant portion in long-term bonds earning approximately 1.56% with an average maturity date of over 10 years. This saw positive gains for a while, as the 1.56% rate was above the deposit rates, but it quickly unfolded.

In the last year, the Federal Reserve increased interest rates dramatically, resulting in the rate SVB was paying to deposit holders growing to 4.50% per annum for start-ups. This was considerably beyond the 1.56% they were receiving on the bonds. In addition, the assets held in bonds fell in value (bond yields and prices move in opposite directions), creating a double hit.

In response, SVB tried to prop up its balance sheet by selling assets. Via social media, investors learned of the sales and became skittish. They quickly withdrew their money, creating a classic bank run. SVB was left with no liquidity and significant losses, forcing them to default.

Could this spread to other banks?

For the majority of investors, this is the biggest question. While the rapid rise in interest rates has caused meaningful short-term losses for the banking industry, industry capital levels are better positioned to weather the storm. The regulatory response from the Federal Reserve, the FDIC, and the US Department of the Treasury has been quick, unified, and substantive. In the short term, we’d not be surprised to see market volatility remain elevated, reflecting the increased uncertainty around potential outcomes. Still, most banks have much more diversified funding sources and lend to a broader range of industries.

Is it isolated to technology and crypto-related businesses?

Not necessarily, but this industry is significantly more exposed, as many companies operate with negative cashflows that require ongoing funding. If the funding dries up, this can cause severe stress.

Will taxpayer-funded bailouts occur?

The short answer is that we don’t know. Liquidity support is being offered to protect the banks’ customer base, but this has been part of the role of central bank authorities for many years and one with which they are familiar.

What portfolio actions make sense right now?

At the core, your portfolios hold a wide range of assets diversified by asset class, sector, and industry and designed to navigate broad risk factors. For long-term investors, this type of strategy is best for long-term success.

We want to help you understand what matters and what doesn’t. We are monitoring risks, investing in line with your risk tolerance, and finding opportunities to reach your goals. Our actions are always oriented toward your financial plan and making decisions consistently over time.

Please don’t hesitate to contact me with any questions about your financial situation. I’d be delighted to help.

Best, 

Henry Gorecki, CFP® 
HG Wealth Management LLC 
401 N Michigan Ave, Suite 1200
Chicago, IL  60611
312-723-5116