- Business owner
- Family Trust
- Professional Adviser
By Andrzej Borkowski
Client 1: “There’s something wrong. The bank won’t give someone their money!”
Client 2: “Well, I’m going to get mine! Come along, young man! I want every penny!”
Banker: “Stop all payments. Stop all payments.”
The above is from the scene in Mary Poppins where other customers overhearing the bank not wanting to give a child his tuppence back caused a bank run. As in Mary Poppins, so in Silicon Valley? Well not quite.
Over the weekend we saw the failure of Silicon Valley Bank (SVB), a small US regional bank, based in California that specialised in lending money to and holding money for the tech sector and the Californian based start-up sector. The US banking regulators stepped in to protect customer deposits in full, and even President Biden took to TV to re-assure the public about the broader US banking system. The prompt response by the US banking regulators would imply that they perceive this as an idiosyncratic event.
So what actually happened at this bank? Silicon Valley Bank had grown very rapidly over the past few years, and had benefitted from the growth of the whole US tech sector and focussed most of its activity in this industry. This meant that compared to a typical UK high-street bank for example, most of its deposits were cash from tech companies and had very little in the way of retail deposits (so rather than having lots and lots of accounts with smaller sums, it had a larger concentration of big accounts). This also meant that the deposits it had were a lot less “sticky”, as the majority of them were either monies needed for the next 3-6 months payroll OR monies received from venture capital funds awaiting investment.
When you deposit money into a bank, the bank will make a judgement of how to invest that deposit so that it can both make a return for itself and you, in the form of interest, all the while making sure to have enough on hand to pay back any depositor wanting to make a withdrawal vs making only longer term investments.
In this regard it was a victim of its own success, while it was in the fortunate position of having a very large amount of deposits to put to work, it had not done a good job of risk management in terms of matching the money it was investing with the expected withdrawals of investors. This meant it had essentially invested too much for the longer term in investments it was planning to hold until maturity and not sell. These longer term investments had gone down in value in the short term following rising interest rates, even though if held to maturity they would be earning the bank a positive return. European and UK banks by comparison hold very little in these types of longer term investments.
Given the clubby nature of the Silicon Valley tech sector and the speed of information travel in the age of social media, once a few influential investors suggested that the companies they advise re-evaluate using SVB as their bank, there was a huge amount of money trying to be taken out of the bank at once. On Friday it was estimated almost 25% of the banks deposits were taken out in one day ($42 billion out of approximately $170 billion). This forced the bank to sell large parts of its longer term investment holdings, which at today’s prices meant it was forced to lock in losses in these. Then as described at the beginning of the article, forced the US banking regulator to step in.
So while an issue that affected a small regional bank has resulted in heightened worries about the broader banking industry, the views of many industry experts is that this is very much not another Lehman Brothers or Northern Rock moment.
As far as investments we make on behalf of our clients we will be monitoring the situation very closely, both from a risk management point of view and we’ll be on the look out for any potential opportunities. We’ve looked through the different investments that we make on behalf of our clients, and other than short term market sentiment, don’t see any material issues.
As ever, the Arcrate Team are always at the end of a phone or email should anyone have any concerns.
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Important Information: With investing, your capital is at risk. Opinions constitute our judgement as of this date and are subject to change without warning. Past performance is not a reliable indicator of future performance.