Two banks, Silicon Valley Bank & Signature Bank, collapsed in a crisis that evolved over the last few weeks. Silicon Valley Bank’s failure stemmed from a concentrated client base (the tech industry), reserve assets invested in long-duration debt that soured following interest rate rises, and ultimately, a ‘run on the bank.’ New York’s regulators closed Signature Bank to prevent broader contagion. Clients became concerned about Signature’s exposure to crypto assets following the failures of cryptocurrency exchanges and initiated a ‘run on the bank.’ Since these failures, the FDIC has stepped in, guaranteeing the full assets of the banks’ depositors.
Credit Suisse, Switzerland’s second-largest bank by assets, had been challenged by several events in recent years, including the collapse of bank clients Greensill Capital & Archegos Capital Management and large withdrawals from institutionaland private wealth depositors. Ultimately, Swiss regulators stepped in to stabilize their banking system, negotiating the purchase of Credit Suisse by rival UBS Group.
As of February 28, the S&P 500® held a five basis point (0.05%) position in SVB Financial Group, the parent of Silicon Valley Bank, and a two basis point (0.02%) position in Signature Bank. Weights were similar for the Russell 1000® Index, a measure of domestic large cap equities. Credit Suisse comprised four basis points (0.04%) in the MSCI All Country World Index (ACWI) ex-U.S.A. as of February 28. Our research has shown that while some mutual fund managers were exposed to these problem banks, that was typically in small weights that made a minimal impact to fund performance.
In the U.S., stock trading in regional banks has been volatile as the market evaluates contagion risks. With fears of another bank run, First Republic Bank received $30 billion in deposits from a coalition of larger banks in a deal mediated by banking regulators. With today’s higher interest rates, regional banks are faced with liquidity concerns. Bank reserves, while invested in high-quality debt such as U.S. Treasuries, have seen market value declines as bond interest rates rise. Institutional and retail customers are paring back deposits as they struggle with higher inflation and there are concerns that some banks could be forced to liquidate reserves at fire sale prices. However, the Fed has opened an emergency lending facility, which allows banks to borrow money using their high-quality reserves as collateral. The Fed is accepting the debt at par value, not mark-to-market, and for loan terms up to one year. This is intended to give banks time to shore up their balance sheets. The market is now focused on concerns that higher interest rates are forcing lenders to tighten up lending standards, which could slow down the economy.
The Fed is meeting this week to discuss interest rates, the economy, and inflation. Before the bank crisis, traders largely fell in with an expected 25-50 basis point increase from the Fed. Fed action is less clear today. While the Fed has focused on inflation numbers that are still high (although declining from its peak), and unemployment that is still low (but the labor market is showing some signs of thawing), there is increasing concern that bank liquidity issues and tighter lending standards will slow the economy more than perhaps the Fed has projected.
Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice. Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.