Silicon Valley Bank (SVB) in California specialised in lending to early-stage businesses. Losses on SVB’s investment portfolio led the bank to try and raise new capital from shareholders. When this attempt failed, SVB customers started withdrawing their deposits, the scale of which was large enough to force the bank to liquidate more assets to meet the cash-flight. These asset sales created mark-to-market losses (due in part because of the rate rises over the past year), led to further deposit outflows and a sharp fall in the value of the bank’s shares last week.
Over the weekend, regulators eventually stepped in and the bank was declared insolvent.
SVB’s collapse is the worst US financial institution failure since the financial crisis. It was the 16th largest bank in the US, operated in 13 countries and had $209 billion in total assets at the end of 2022.
In the US, the Federal Deposit Insurance Corporation and the US Treasury has announced that the deposits of all customers of SVB will be protected and that customers will have access to their cash today. SVB has several subsidiaries, one of which was a UK bank which has been acquired by HSBC this morning and protects SVB’s UK clients.
At this point, it appears as though it’s shareholders and creditors of SVB that are facing losses. There is broader market weakness with some commentators warning about the risk spreading. Indeed, there are other small regional banks in the US facing pressure from higher interest rates, so it’s possible we’ll see more headlines in the days and weeks ahead.
US authorities have stepped in to protect depositors and supply credit lines to the banking sector. In general, banks are far better capitalised today than they ever have been.
Investment implications
We believe SVB’s collapse has a few investment implications.
First, SVB’s niche was supplying support to higher risk tech and life science start-up companies, supporting them through their early unprofitable years. In many cases for years before they generate any revenue at all. Start-ups may find it difficult to find new and flexible lenders. Innovative new businesses will still succeed, but the era of growing revenues at the expense of profits using cheap capital is firmly in the past.
The other important implication is for monetary policy, particularly in the US. Federal Reserve Chair Powell and a select number of other voting members at the US central bank have recently commented on the persistence of inflation and how, as a result, interest rates will need to rise further and remain elevated for some time. With the collapse of SVB and broader pressure on banks, it is likely the US Fed will re-evaluate the impact of monetary policy enacted so far, and this should influence future rate decisions.
However, we don’t think monetary policy is suddenly going to ease. The US labour market is still strong, and we are yet to see core inflation fall in a meaningful way. As such, the most probable outcome in the near term will be for interest rates to hold steady until the dust settles.
Portfolio resilience has been a focus for EQ Portfolios for some time, with a preference towards higher quality companies that are cash generative. We expect this bias to remain in portfolios for the near future.
