By Dr. Charles Lieberman, Co-Founder & Chief Investment Officer
Silicon Valley Bank’s failure requires significant intervention by the Fed and Treasury. That has already happened and by guaranteeing all bank deposits, the flight out of banks should run out of steam.
However, there are many issues that remain here. So, let’s address them one at a time.
First – Many companies, mostly tech firms, had much or all their cash at SVB. Without the guarantee of those the deposits, many of those companies would fail, with broader ripple effects. Things like payroll and vendor payments were at risk. So, the government’s guarantee of the deposits will go a long way to stem these concerns.
Second – Are there other banks with large holes in their balance sheets? Bank accounting is a tricky thing, with assets classified as “Available for Sale” and “Held to Maturity”. It is likely that every bank has embedded losses in their “Held to Maturity” investment portfolio, as they hold some longer duration assets in a period of rising interest rates. However, it is very unlikely that other banks have the huge losses relatively to their capital base like SVB did.
Third – Will more banks fail? That seems doubtful for normal banks. (I exclude crypto banks.) The Fed will want to resolve this situation as quickly as possible. Aside from the deposit guarantee, the Fed has created a Bank Term Funding Program, to “support American businesses and households by making additional funding available to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors.”
Fourth – Are West Coast institutions at greater risk? They appear closer to the center of the storm, but the Fed’s deposit guarantees apply to them, too.
Five – Are there some other special situations where the risks are high? Yes, various companies are having to look at how they borrow, invest and support their clients. Stock prices have reflected this with incredible volatility.
Sixth – What else might the Fed do? Much depends on how quickly the Fed can calm markets, financial institutions, and their clients. The FOMC meeting is next week and much will occur by then. Right now, our thoughts are that they would avoid putting any more stress on the system by deferring another rate hike. But that’s a very short-term situation. The labor market has gotten very tight and they will likely conclude that rates need to rise further, unless the economy weakens considerably in response to the bank turmoil. So, it makes sense for them to wait to allow things to calm down and to see how much the economy reacts to the turmoil. Unlike 2008, the Fed is responding to the problem quite smartly.
Lastly – As portfolio managers, what should we do or are we doing? We have reviewed the balance sheets of our holdings to determine if they are at risk. We think not. The decline in bank values is quite excessive, but understandable, in our judgment. This creates unusual opportunities. The money center banks are already seeing deposit inflows, although the share prices are down. We think this offers a compelling entry point for clients with a tolerance for risk.
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