The Ripples of SVB
Friday morning, the FDIC took control of Silicon Valley Bank (SVB) following a massive outflow of deposits. SVB’s customers were largely start-up tech companies with a high need for cash to fund operations. These companies held deposits with SVB but the high need for cash required an outflow of deposits from SVB. To meet the deposit outflows, SVB was forced to sell bonds from their securities portfolio and within the last few weeks, SVB sold $21 billion of Treasuries with an attached loss of $1.8 billion. The realized loss left a hole in SVB’s capital base the company was attempting to eliminate with a $2.5 billion raise in equity capital. However, the need to raise capital spooked that venture capital firms invested in many of the tech start-ups with deposits at SVB, prompting the venture capital firms to push the depositors to withdraw money from SVB. Thursday of last week, depositors withdrew a whopping $42 billion from SVB forcing the FDIC to assume control of SVB Friday morning.
This was a classic run on a bank, and like ripples in water, bank runs tend to ripple out. The collapse of SVB was no exception as the east coast Signature Bank was taken under during the weekend as depositors pulled $10 billion from the bank Friday citing concerns over unrealized losses in its securities portfolio and 89.7% of deposits uninsured. Other banks faced a weekend of reckoning with First Republic tapping extra liquidity from the Fed and JP Morgan on Sunday to meet a Friday’s deposit outflows. Predictably, the stock prices of banks like SVB and Signature declined precipitously, with First Republic dropping 77% at one point and money center banks such as Citi and Bank of America down 4% or more.
What exposure do clients of Allen Trust Company have?
Our clients have no direct exposure to either Silicon Valley or Signature Bank. These two banks were held in index and sector ETFs and funds, so our exposure is limited to the benchmark weighting of the respective companies within the respective ETFs and funds.
Looking at the ripples, we can make the same no exposure statement regarding banks such as First Republic and Pacific Western among other regional banks. We do have exposure to the banking sector through the large money center banks including Bank of America, Citigroup and JP Morgan as well as some super-regional banks like US Bank, Fifth Third Bank and KeyCorp.
In response to the collapse of SVB and Signature, the Fed Treasury created programs designed to avoid additional collapses, with the most important program being the guarantee of 100% of all deposits regardless of size. This was created to calm depositor sentiment and potentially end the flight of bank deposits from the regional banks. The withdrawal of deposits did end which on a surface level means this program worked for the short-term. The outlook for the remaining regional banks is, in our view, positive. Banks like First Republic and Pacific Western are well capitalized with very conservative balance sheets and well diversified investment bond portfolios. The blemish on these banks is the large balance of uninsured deposits, but with the FDIC now guaranteeing all depositors of SVB and Signature, we believe they will guarantee all depositors of every bank. The downside to this guarantee is higher expenses to the banks for expanded FDIC insurance coverage. These higher expenses will either be passed on to depositors, making deposits at banks even more expensive, or absorbed by banks, reducing profitability. On top of this, it is likely, that regional banks may be classified as systemically important banks to allow for the guarantee of all deposit balances, which would increase expenses to these banks.
The result will be higher expenses to banks and lower earnings from bank deposits for customers.