Our office has been fielding a fair number of calls regarding the Silicon Valley Bank failure. With the amount of recent public discourse about this matter, I thought it might be a decent topic for this month’s missive.
The Silicon Valley Bank (SVB) debacle is just that: A debacle. As the dust begins to settle after the initial shock of the bank’s failure, it appears there were two main issues for SVB. First, if the financial media reports and the U.S. Treasury Secretary’s remarks are correct, SVB’s internal financial controls were not well managed. Sounds like jargon. More simply stated, they took a huge gamble by investing a large portion of the bank’s internal investment portfolio in long-term bonds. Not junk bonds. Mostly bonds of the highest quality, like United States Government guaranteed bonds. However, the longer term the bond, the more principal fluctuation and volatility there will be for that investment. Why would SVB invest this way? One can only guess that the folks in charge at SVB believed interest rates would go lower and the longer-term bonds would rise in value. By definition, that is speculation. SVB had been warned by their regulators (as early as 2021) about this issue. Some politicians and pundits are voicing criticism at the regulators, submitting that the regulators were not tough enough on the SVB top brass. In the SVB annual and quarterly reports, the top management of SVB only slightly mentioned the risk of their long-term bond speculation. Please know that it is prudent that most bond portfolio managers will own (invest money into) some long term bonds. They will also invest into someintermediate term bonds. They will also invest into some short-term bonds. The “not having all your eggs in one basket” theme is pretty much just common sense. If the reports are correct, there was way too much speculation on interest rates by SVB in their internal investment portfolio. Interest rates, in fact, did not go down as the SVB folks must have been hoping. Instead, they went up and the immediate issue for SVB was their bond portfolio value went down. By a lot. This created a large paper loss on the bank’s internal investment portfolio. And then, the second shoe dropped: Gossip. Just exactly like happened in the year 1929, some depositors in SVB started to panic and began to pull their money out of the bank. They also started to talk (gossip) about it. One very important difference from 1929 – the internet. The gossip line wasn’t just people talking about this across the back yard fence or in a coffee shop. The talk spread on social media. Rapidly. On March 28, 2023 Congressional testimony from Michael Barr, Federal Reserve Board Vice-Chair for Supervision, “On March 9, 2023, panicking depositors withdrew $42 billion of deposits form SVB. SVB warned their regulators that same night the indications were customers were requesting another $100 billion in withdrawals. This combined total of $142 billion represented 81% of SVB’s total deposits”. There is no bank that can survive that level of deposit outflow. The bank was closed and taken over that evening by the regulators. There was no other option. The FDIC, the Federal Reserve, and all the regulators made a decision to make all depositors whole. No depositor in SVB will lose their deposited money. What a mess. At roughly the same time, a couple of other U.S. banks had similar fates. And people all over the world became anxious about their deposit bank and the banking system in general. No doubt, there are banks in our country that need more scrutiny. Surely, we will see more publicity of some banks that will be facing more oversight. Thankfully, most banks don’t operate with the level of speculation in their internal investment portfolio as did SVB. Bottom line: SVB’s top management screwed-up, they gambled. What put the nail in the SVB coffin was the panic run on the bank’s deposits. Game over.
What advice are we giving our clients about their deposit banking relationships? First, as individuals and families, don’t have more than the FDIC insured level of deposits in any bank. Sounds simple and it is simple. In this age of technology, it is easy to spread assets around to different institutions and have the short-term money you want to be completely FDIC insured. Most every financial advisor is equipped to help clients accomplish total FDIC insurance for their deposit accounts. Second, don’t panic. Panic is when people get hurt. There is a lot of news media chatter that if SVB hadn’t had the run on deposits, they would still be in business today. We will never know for sure. Clearly, the run on the bank played a major role in its demise.
I personally have every confidence in the United States banking system, the FDIC, and our Federal Reserve Board. I only hope that this latest debacle doesn’t over-tighten the entrepreneurial lending ability of our banking system. That would be a tragedy that could stifle our economy and cause long-term problems for business and economic growth. If we can help you with your financial affairs in any way, please give us a call.
-by Ben Smith
Registered Principal, RJFS
313 East 10th Ave. • Bowling Green, KY 42101 • Phone: 270-846-2656
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