Gill Capital Partners March 2023 Update - Silicon Valley Bank

Silicon Valley & Regional Bank Update

As many of you are aware, Silicon Valley Bank (SVB) was taken into receivership by the FDIC on Friday, March 10th. SVB was the 16th largest bank in the nation and the second largest bank to fail in U.S. history, second only to Washington Mutual in 2008. This is a fluid situation, and we will keep you updated over the coming days and weeks as the situation evolves.

What Happened, and Where We Stand Now

Silicon Valley Bank was a household banking and lending name in the technology, venture capital, and private equity eco-system, and its clients include some of the best-known brands in the world. The bank began its slide into insolvency when customers, mainly large tech companies, began withdrawing their deposits as financing options started to dry up. The increase in withdrawals forced the bank to sell assets (largely Treasury bonds and other high-quality securities) which, due to rising rates, had gone down significantly in value. This resulted in a potential $1.8 billion loss for the bank that was reported late on Wednesday. This news sparked a huge wave of withdrawals on Thursday as venture capital firms and corporate depositors attempted to move funds out of the bank. By the end of the day on Thursday, customers had withdrawn a staggering $42 billion of deposits, resulting in a negative cash balance of $958 million for the bank. What transpired last week was a liquidity failure, a classic “run on the bank.” As depositors got wind of liquidity issues, they rushed to pull deposits from the bank, effectively creating a liquidity crisis. By Friday, the FDIC was forced to step in and seize the bank.

U.S. Government Steps in

On Sunday afternoon, the government stepped in with a plan to reassure depositors and provide confidence in the banking system. Depositors will have full access to their deposits as part of multiple moves approved and announced on Sunday. The plan will utilize the FDIC to cover deposits in excess of the standard $250,000 per account FDIC insurance. Additionally, the Federal Reserve announced the creation of a funding facility aimed at safeguarding institutions affected by the market instability. Government officials, including Treasury Secretary Yellen and President Biden, have made it clear that they will not bail out the banks or their investors, but they will move swiftly to protect depositors and customers of these institutions.  

What Happens Next?

The government’s actions up to this point have stemmed further contagion. We anticipate many headlines and additional announcements as this situation develops and we’ll likely see significant volatility in the near term. Now that depositors have been made whole, we will see if other issues present themselves. The biggest questions are whether the government’s moves are enough to contain the issue from spreading to other banks and what impact SVB’s failure will have on the economy. Will this have a meaningful impact on economic growth going forward? It’s too early to tell, but at the very least, we believe this is likely to restrict capital and lending, which will impact growth at some level.

How does this impact assets held at banks or custodians like Charles Schwab or TD Ameritrade?

Unless you were a direct client of Silicon Valley Bank, you likely have nothing to worry about. Neither Charles Schwab or TD Ameritrade have any affiliation or business with SVB. Assets such as mutual funds, equities, ETFs and bonds held in your investment account at custodians like Charles Schwab and TD Ameritrade are not impacted by these events directly, as they are securities not directly tied to a custodian or bank. They may decrease or increase in value on news headlines, but they are not at risk in the same way that an uninsured bank deposit could be at a bank. Charles Schwab and TD Ameritrade accounts are insured through SIPC, and also have significant private coverage through Lloyds of London. If you have cash deposits at a single bank in excess of $250,000, we would like to have a conversation with you about strategies to ensure all of your deposits are insured. Please reach out to us to discuss how to best optimize and safeguard your cash.

What does this mean for the Federal Reserve and future rate increases?

The Federal Reserve is set to meet next Wednesday afternoon to announce their rate decision. Prior to the Silicon Valley Bank failure, the Fed was preparing the markets for higher rates on the back of sticky inflation. We don’t yet know how the events of the past week will impact their decision, but bond markets and futures markets have done a complete 180 on the news. Interest rates have dropped significantly, and futures are now pricing in a lower rate environment. The 2-year U.S. Treasury dropped 100 basis points (1%) over the last few days, the largest such drop since 1987. These moves in bond markets reflect speculation that the Federal Reserve could be forced to slow (or even pause) the pace of near-term rate hikes in order to prevent other banks from suffering similar issues. In fact, Fed Funds futures are now pricing in a high probability that rates will be lower one year from now as the Fed will be forced to cut rates later in 2023. It seems unlikely that the Federal Reserve will maintain their aggressive posture in the face of the second largest bank failure in U.S. history. We would not be surprised at all to see significant softening in the tone and actions of the Federal Reserve.

We anticipate that there will many developments over the coming days and weeks and will keep you informed as important information becomes available.

As always, please let us know if you have any questions or concerns, or if we can provide assistance with any other financial planning matters including education, taxes, insurance or estate needs.