What has happened:
- On 10th March 2023, Silicon Valley Bank (SVP), which was the largest bank by deposits in Silicon Valley, and the 16th largest bank in the US, failed after a run on its deposits.
- Details of the various factors that contributed to the failure will continue to come out over the days, weeks and months ahead, but at this stage it appears that the bank’s capital had been eroded by losses experienced in 2022 as interest rate rises and a downturn in the tech industry impacted business generally, and particularly led to reductions in the value of the long bonds in which it had invested deposit holders money.
- As information on these losses came to light, concerned deposit-holders began to withdraw their deposits, with reports suggesting that $42bn was withdrawn on Thursday 9th March, leaving SVP with a negative cash balance of $1bn, which the bank was unable to fill, leading to the regulators stepping in and putting the bank into receivership on Friday 10th
- Early indicators are that this is likely to represent the second largest bank failure ever in the US, causing concerns amongst other market participants of possible contagion risks, similar to those that transpired during the 2007-2008 global financial crisis. These concerns have been fanned by the closure, on Sunday 12th March, of Signature Bank, by New York Regulators.
- Following the initial involvement of the regulator and Federal Deposit Insurance Corporation (FDIC) in putting SVP into receivership on Friday 10th, and closing Signature Bank in New York on Sunday 12th, the Secretary of the US Treasury, Janet Yellen, the Federal Reserve chairman, Jerome Powell, and the FDIC Chairman, Martin Greunberg, issued a joint statement on Sunday 12th March 2023, that all deposit holders at SVP would be fully protected and will be provided with access to their money on Monday 13th
- Equity and bond markets have reacted strongly with many banks coming under pressure and bond yields falling sharply. Markets have started to question whether or not the disturbances in the financial sector might prevent the Fed proceeding with the rate rises that were previously expected to be announced at its March meeting next week.
- Regulators and politicians across the US and other developed markets have been quick to address fears amongst financial market participants of permanent losses and contagion, and appear to be actively engaging in enhanced investigative and mitigating activities. It remains to be seen whether these will be sufficient to calm markets over the short term, or if stronger measures will be required.
What this means for my investments:
- While there are likely to have been many specific contributory factors in the collapse of SVB & Signature Bank, the events of the last week appear to be a stark example of “things breaking” and “fractures in investment markets”, that we explained in our recent Markets in 1 Minute that we expect to see during 2023, as a result of the extent of fiscal and monetary tightening that has taken place over the last year.
- This is a very high-risk environment for short term investors, but long term investors with a plan, should remain calm during times like this and look for the opportunities that are likely to become apparent as the dust settles.