Thoughts on the fallout from Silicon Valley Bank
You’ve likely seen headlines about the recent failures of Silicon Valley Bank and Signature Bank, commercial banks that were taken over by federal regulators on Friday, March 10 and Sunday, March 12. While the government is taking steps to reassure investors, the collapses have understandably drawn concern.
As the details surrounding the future of these firms and their assets continue to unfold, we’d like to address any apprehension you may have about whether these events affect the standing of your financial accounts and cash balances at Raymond James.
In these times of volatility, uncertainty, and media noise, remember that the Cornerstone team is here for you. No one can know exactly what will happen on any given day in the market. But we take steps to ensure we are providing you with up-to-date information and making decisions with your best interests at the forefront!
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What led to the demise of Silvergate Capital and SVB Financial, the parent of Silicon Valley Bank (SVB) and Signature Bank?
The banks had a lot in common:
• Both were niche players that benefited enormously from areas of the market that flourished during the pandemic tech boom. Silvergate Capital was a major banking partner for the crypto industry.
• The lack of diverse deposit bases and their concentrated loan books left both banks in a vulnerable position. Once venture capital funds started to struggle to raise capital, deposits slowed. In fact, their clients started to draw down their deposits at an accelerated pace while they waited for the venture market to recover. The banks were unprepared for this. Many of the companies had large deposits, in excess of $250,000 – so the vast majority were uninsured – or over the FDIC limit.
• The social media mania – the speed at which they collapsed felt much like the meme stock mania, where investor psychology and rapid-response money flows drive the fate of the company. The hysteria-induced bank run caused clients to withdraw a staggering $42 billion deposits from Silicon Valley last Thursday, sealing its fate the next morning.
Where do we stand now?
Silicon Valley Bank was taken over by the FDIC on Friday, March 10, leaving many tech companies and start-ups scrambling to make payroll and wondering about the fate of their uninsured deposits over the weekend.
The Federal Reserve (Fed), Treasury, and FDIC took swift actions to help ease concerns that there may be other banks with similar hidden risks.
Among the announcements:
• Depositors of Silicon Valley Bank and Signature Bank will be made whole - they will be able to access their full deposits as of March 13. Any cost of fully insuring these deposits will come from a special assessment of FDIC insured depositories, which is a hit to industry earnings. Note that the FDIC was already in the process of increasing insurance premiums to shore up the Deposit Insurance Fund.
• A new loan facility, the Bank Term Lending Program, will provide emergency loans up to a period of 12 months to help banking institutions access capital when needed.
At a minimum, these actions should help reduce the potential of significant outflows of bank deposits at some institutions.
How These Bank Failures Will Affect the Federal Reserve
The failure of SVB is a game changer for the Fed. Depending on how these events play out in the coming days, weeks, and months, it could change not only the narrative from the central bank but also the path and direction of interest rates. For now, the probability of a March increase in the federal funds rate is less certain than it was last week. The result will depend on the evolution of this crisis up until the Federal Open Market Committee meeting on March 21-22, 2023. While past crises have historically led to easier monetary policy, the Fed does not have the same flexibility today because of elevated inflation. The Fed will need to tread carefully from here.
What This Means for the U.S. Economy
For the US economy, the potential effects are less clear, as they will depend on how the current crisis evolves over time and what the Fed decides to do with interest rates. We will continue to monitor the events and make the necessary changes to our forecast.
What This Could Mean for the Equity Market
Patience remains a virtue as we navigate through this situation. We remain optimistic about the long-term equity market. Why?
• This banking crisis, and the potential increase in financial market instability, has likely caused the Fed to rethink aggressive interest rate hikes moving forward. For example, rather than the debate of 0.50% or 0.25% at the March 21-22 meeting, the debate will be whether to hold or raise rates 0.25%. Historically, the end of a tightening cycle is a positive catalyst for the equity market.
• Lower short-term interest rates (as the Fed ends its tightening cycle) and lower long-term interest rates (as we believe the 10-year Treasury yield has peaked) should be positive for the equity market. This is positive for equities for many reasons, including lower funding costs and higher potential multiples. In addition, we believe these lower rates should provide a boost for growth stocks.
• Outside of the Financials sector we expect the impact of this crisis to be minimal given the backstop of uninsured depositors.
The Bottom Line
The recent failure of these commercial banks is an unfortunate result of the rapid rise in interest rates. The quick response from regulators and the creation of a lending facility should limit the fall-out to the broader economy and financial markets. The silver lining may be that the Fed moves more slowly in raising interest rates and may potentially end its tightening cycle earlier, which should be a positive for the economy and both the fixed income and equity markets.
We will continue to provide necessary updates as needed during this fluid situation.
It can be difficult to ride out volatility without reacting emotionally, but it’s important to maintain discipline and focus on your long-term goals and best interest. When your life and wealth are built on a Cornerstone plan you can pursue greater dreams and make the impact you’re truly capable of making – in your life, in the lives of those you love, and in your legacy.
If you have any questions or would like to talk about the legacy you’d like to leave, please contact our office at 605-357-8553 or email me at cfsteam@mycfsgroup.com
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