By Rebecca Ellis
MON. 13 MARCH 2023-theGBJournal | With the failure of Silicon Valley Bank, the markets are spooked and have slipped some 4 percent since the news broke.
Is this in any way comparable to the Great Financial Crisis of 2008, when the extent of many mainstream banks’ exposure to leveraged investments was laid bare?
Who are SVB?
Silicon Valley Bank was founded in 1983 in Santa Clara, California, and quickly became the leading bank for the technology sector. The company has $200 billion in assets: just a fraction of the size of Wells Fargo, JP Morgan and other leading US banks.
What sparked the rout?
The bank went to the market to offer a $2.25 billion share sale after selling $21 billion of securities from its portfolio at a nearly $2 billion loss.
This caused wide-spread panic in the market on concerns that the bank’s failure could have a knock-on effect.
In 2022 the technology-heavy Nasdaq Composite index fell by 30%.
The bank’s primary clients include venture capital and private equity firms which invest in technology start-ups, and can generate large profits – or losses. This concentration means an economic environment such as the current one when their clients are under severe duress puts their entire business at risk.
As concerns about the bank’s stability grew, profitable companies started pulling their funds at a rapid pace, which led to a liquidity crunch at the bank and a halt of trading in the holding company’s shares, prompting the regulator to close SVB.
Is there a risk of contagion?
“The major difference between 2008 and now is that today major US banks are well capitalized and their investment banking is segregated from retail banking activities,” noted Kifah Salameh, managing partner at multi-family office AKTS. “Yes, the property market is going south – logical with interest rates going up and high earners losing their jobs in the tech and financial industries – but we’re far from the frenzy in collateralized debt obligations and other funky techniques that banks used to offload non-performing loans from their balance sheets in order to sell even more loans. Therefore, I don’t see the contagion effect we had in 2008 taking place this time. Yes, there will be banks other than SVB that go under – probably again banks with strong ties to the tech industry, or active in regions like Miami or San Francisco that benefited from the boom in cryptos and start-up over-hype. But that’s not likely to drag the whole financial system down. Bank of America, Citi, Wells Fargo, JPM etc… are all doing fine and can carry the financial system out of the woods, especially now that they can profit from higher rates. In Europe, it’s pretty similar; banks are probably even better capitalized than in the US.”
“Another thing with SVB is that while the FED was pumping money in the system during COVID and that there was very high demand on small-cap/high-growth stocks and not enough companies to invest, most US banks had bought loads of US Treasuries to park the money, at a time real yields were negative,” added Salameh. “What the vast majority of the banks did, though, was to cover duration risk in 2021 and 2022, to mitigate the impact of potential rates hikes. SVB did not cover duration risk and got caught with their pants down when the tide went out. Growth stocks plummeted, creating margin calls and forcing the bank to sell its Treasuries at loss. Furthermore, SVB’s Chief Risk Officer left in April 2022 and took 8 months to be replaced.”
What is the impact on you?
The US Treasury and the FDIC have resolved to fully protect all depositors in the bank. Even so, it is a concerning moment for tech companies. It may be time to trim tech-focused positions and wait for the dust to settle.
While few commentators currently perceive a systemic threat, SVB’s demise may be the trigger which finally pushes the US into a long-expected recession. This could in turn spark a further sell-off in equities.
Lessons to be learned?
Diversification is key and this is an example of how business including banks need to be diversified.
If you are at all concerned, please give us a call and we can discuss how to guide you through these troubling times.
Co-author Martin de Sa Pinto, Martin de Sa Pinto Research
Rebecca Ellis is Family office advisor based in Switzerland |www.aktspartners.ch|Contact: re@aktspartners.ch
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