Silicon Valley Bank (SVB) had a distinct niche, catering to venture capitalists. As venture capital boomed in 2020 and 2021, so did SVB’s deposits:
SVB used those deposits to buy bonds. Not a bad idea, if you’re careful about which bonds you buy. SVB was not. They bought intermediate-term and long-term bonds. The longer-term a bond is, the more it will fall as interest rates rise. Illustrated in the chart below, as rates rose and bond prices fell, SVB became insolvent.
In a nutshell, SVB was double exposed to the same risk. Their primary clientele, venture capitalists, were arguably the largest beneficiaries of ultra-low interest rates. As rates rose, their businesses suffered and withdrawals from SVB increased. To meet the withdrawals, SVB was forced to sell bonds that they had planned on holding to maturity, locking in losses and ultimately bringing down the bank. This would have been preventable with prudent risk management, but SVB’s Chief Risk Officer left in April 2022 and was not replaced for 8 months.
So, how widespread a problem is this? TBD. The Fed has promised to make all SVB depositors whole. Hopefully, other banks have better risk management, but the government appears willing to backstop their depositors even if they don’t.
Going forward, there are many unknown questions. Is $250,000 still the upper limit of FDIC insurance, or are all deposits now federally insured? Does this perversely incentivize banks to take more risk with customer deposits? How will SVB’s collapse affect the Fed’s decision on interest rates next week? Will it cause them to be more cautious with future rate hiking cycles?
The biggest question on everyone’s minds, though, is, “what does this mean for me, the investor?” The first crucial step is not getting caught up in the crisis. Not an easy feat when the media is excitedly trumpeting “LARGEST BANK FAILURE SINCE 2008!” Resist the urge to sell out of fear. This is not 2008. You could argue that in the short term, the current instability will give way to stability, as the Fed might view this incident as a reason to pause or reverse their plans for additional rate hikes. Either way, 100 years of market history suggests that making short-term bets on the market is futile. If you have a diversified portfolio and a long-term plan, stick to it. If you don’t, and need help developing one, don’t hesitate to reach out.
Disclaimer: Truepoint Wealth Counsel is a fee-only Registered Investment Adviser (RIA). Registration as an adviser does not connote a specific level of skill or training. More detail, including forms ADV Part 2A & Form CRS filed with the SEC, can be found at TruepointWealth.com. Neither the information, nor any opinion expressed, is to be construed as personalized investment, tax or legal advice. Any reference to an index is included for illustrative purposes only, as an index is not a security in which an investment can be made. Indices are unmanaged vehicles that serve as market indicators and do not account for the deduction of management fees and/or transaction costs generally associated with investable products.