By: Timothy A. Hoyle, CFA, Chief Investment Officer
After suffering a classic run-on-the-bank, the FDIC has taken control of SVB Financial Group, the parent company of Silicon Valley Bank. Following the announcement of major losses in their bond portfolio and a botched equity raise, social media lit up with recommendations for clients to withdrawal their money from the bank.
SVB has become an integral partner to much of the venture capital, private capital, and start-up community. According to their website, 44% of U.S. venture-backed technology and healthcare IPOs bank with SVB. This is the second largest bank failure in history, second only to Washington Mutual in 2008, and its repercussions will likely be vast and deep.
For those individuals and companies that didn’t get their money out yesterday, news reports state that the FDIC has stepped in and next week will provide insured depositors with their funds. Uninsured depositors (those with balances in excess of $250,000) will be given a receivership certificate for the amount of their uninsured funds. According to their latest 10K filing, as of December 2022, the bank had $151.5 billion in uninsured deposits out of a total of $173 billion.
Is this a one-off occurrence precipitated by a number of bad decisions, or the harbinger of risks lurking in every bank? CNBC’s Steve Liesman made a very telling comment today, after hearing anecdotal stories of how SVB served their clients. To paraphrase, he said it sounded like they were operating more like a venture fund than a bank. While we don’t believe this is the beginning of a financial contagion, no doubt investors have been shaken and a contagion of confidence is possible.
Our opinion of the overall financial system hasn’t changed: we believe banks are well capitalized, well regulated, and in most cases well-run.
Haverford and our clients’ investment portfolios have no direct exposure to SIVB stock. The financial exposure in our model portfolios is well diversified between banks, most notably J.P Morgan, and non-bank financials, such as Blackrock, S&P Global, and AON. We have long maintained a much larger weighting to our non-bank holdings and favored J.P. Morgan among banks, which we believe is conservatively managed and has one of the strongest balance sheets in the business. While it is only one day, it is encouraging to see JPM traded higher on Friday.
It is difficult to untangle the market’s reaction to the jobs report from the reaction to SVB. Looking beyond the headline number, the jobs report was mixed and probably won’t trigger a faster pace of interest rate hikes nor get the Fed to consider a pause. Today’s news does take the edge off Powell’s hawkish tone earlier in the week. While the Fed certainly did not want a bank failure, it has been attempting to tighten financial conditions, which will likely result from these developments.
Quality Investing cannot provide immunity from market forces or insulate investors from the ripples of a bank failure. We do believe this approach can help protect investors’ principal, smooth out market permutations, and provide calm and clarity during periods of market stress. As always, we remain vigilant of market conditions and stand watch over our clients’ financial goals. If you have any questions, please know we are here for you.
