On Friday, March 10, Silicon Valley Bank collapsed after its parent, SVB Financial, shared that it sold its bonds at a substantial loss and was seeking additional capital of over $1 billion. This was an unnerving signal to customers, which, combined with a fresh negative outlook from ratings agencies, prompted a ‘run on the bank.’ SVB’s lack of diversification in its client base, composed primarily of technology and startup companies with large deposits, created considerable concentration risk. As the environment for technology and startup companies deteriorated, mainly due to rising interest rates, customers were pulling more and more of their deposits from the bank. However, at the same time, the bank accumulated unrealized losses on investment securities as interest rates spiked over the past year. SVB owned a relatively large number of long-duration bonds, exposing itself more to interest rate risk, and as the bond yields went up – the market value went down. As bonds suffered greatly in 2022, the bank accumulated large unrealized losses while also facing greater pressure on deposits from its technology and startup customers. When SVB tried to rebuild this gap and raise fresh capital, this alerted depositors to the liquidity issue the bank was facing and thus triggered many customers to rush to pull their money out all at once.
The collapse of SVB is the second largest FDIC-insured bank failure in history. As of February 2023, the publicly traded bank had the 14th largest market capitalization among U.S. banks. In addition to Silicon Valley Bank, Signature Bank, and Silvergate also failed over the last week.
The Federal Reserve and the Biden Administration took emergency steps over the weekend, noting that all depositors at the failed banks will be made whole, an effort to backstop the system and restore consumer confidence. There is uncertainty regarding what the impact of these bank failures will pose on the financial system. The moves made by the Treasury, Federal Reserve, and the FDIC aim to prevent the contagion effects across the broader system. However, larger, diversified banks tend to have less solvency issues resulting from unrealized losses in their securities portfolios, given that they are subject to more stringent reserve requirements and have a more diversified deposit base.
Multnomah Group is monitoring this developing situation and will provide additional commentary as appropriate.
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