Update on Bank Closures & the US Financial System
Late last week, SVB Financial (ticker: SIVB), the holding company of Silicon Valley Bank, announced its financial issues and plan to raise an additional $2.25 billion in equity. The news alarmed investors, causing a 60% drop in the stock price on Thursday. Additional turmoil and bank withdrawals continued into Friday, leading the Federal Deposit Insurance Corp. (FDIC) to close the bank. The FDIC guaranteed all depositors would be made whole, including those with deposits above the typical FDIC-insured limits ($250,000 per depositor, per registration type, per institution). Over the weekend, regulators also closed Signature Bank (ticker: SBNY), which had similar issues covering withdrawal requests from clients. A few other regional banks (none of which are considered systemically important) have hit headlines as investor scrutiny over rate management and bank exposures increases.
While concerns over the rapid rise in interest rates negatively impacting banks added stress to these institutions, it was not the main cause of their demise and we believe the contagion risk will be contained. SVB and Signature Bank both had very concentrated client bases (SVB was focused on venture capital/startups and the tech sectors, while Signature focused on real estate and law firms in New York). These banks were hurt by the timing of large capital flows, poor management of their assets and liabilities, and, specifically for Signature Bank, a relatively new and uncommon acceptance of digital assets/cryptocurrency deposits that began a few years ago.
Rising interest rates put pressure on several industries, as well as individual borrowers. However, outside of the last 13 years, rising rates are nothing new and banks have survived (and even benefited) from rising rate environments. Ultimately, it was idiosyncratic risks that drove Silicon Valley Bank and Signature Bank to close their doors. Going forward, the Fed likely will ease its view on continued interest rate hikes, which may take pressure off several other industries and give our economy time to digest and adjust to new data.
Our portfolios are constructed to mitigate these types of company-specific risks and have no direct exposure to these banks. We continue to monitor the situation to manage risk and search for any opportunities this market dislocation may create.
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