“Investor First!” was boldly posted on a Real Estate investor’s Instagram. Her message was loud and clear. Among dozens of others in social media chat groups concerned about Silicon Valley Bank (SVB), she needed to move money to meet immediate payroll demands.
Once the word is out about a bank’s perceived insolvency, the hemorrhaging of customer deposits is usually the final blow. Remember Wachovia and Washington Mutual? We should have learned from the past, so why did SVB fail?
Messaging – On March 8th, SVB surprised investors with news that it needed to raise $2.25 billion to cover an investment loss of $1.8 billion. Once the news hit, customers took out $42 billion. Within 48 hours, SVB was left with a negative cash balance of $958 million, according to CNBC Finance. Ryan Falvey, a former SVB employee who launched his own fund, told CNBC, ‘When you say, “Hey, get your deposits out, this thing is going to fail. It’s a self-fulfilling prophecy.” According to Falvey, “This was a hysteria-induced bank run caused by Venture Capitalists – VCs.”
Asset Allocation – According to Erick Shenkhuizen, empiriKal partners’ Chief Investment Officer, “SVB failed because it couldn’t meet their customers’ requests for cash on hand… They invested in long-term securities, treasuries, and Mortgage-Backed Securities.” Long-duration securities are adversely affected during a rising interest rate environment. When Silicon Valley Bank investment managers needed to liquidate funds to meet immediate customers’ requests for cash, they sold at a loss, and the bank couldn’t meet its demands.
Regulation – Shenkhuizen stated, “The Dodd-Frank Wall Street Reform and Consumer Protection Act was established in 2010 after the 2008 financial crisis. Some of these regulations were rolled back in 2018. One thing to consider is FDIC coverage, 250K and 500K.” The Volcker Rule of Dodd–Frank restricts how banks can invest. It’s designed to limit speculative investing. In the case of SVB, the most speculative investment holdings mentioned in news coverage are Mortgage-Backed Securities, which are designed to hedge interest-rate-sensitive bonds in a rising interest rate environment. Based on the information available, it seemed like investments that are traditionally considered safe happened to be the riskier holdings in the case of SVB. Perhaps the cash reserve requirement could have been higher. However, as Shenkhuizen mentioned, the low FDIC coverage was a central issue that made investors run on SVB since it only covered 10% of deposits. Most retail bank customers wouldn’t need to worry. However, for a bank that serves mainly VCs and Start-Ups with millions on deposit, the current FDIC coverage model is negligent and needs updating.
“Done is better than perfect,” Shenkhuizen stated. FDIC took quick provisions to stop the hysteria and promote confidence in the banking system. Consumer bank clients don’t have much to worry about. However, if you have questions or need advice on managing your short-term asset allocation to meet immediate cash needs, contact me.
As for SVB, we need to ask ourselves the age-old question from Plato’s the Republic, “Who guards the guardians?”. Looking at Home | Silicon Valley Bank (svb.com), you’ll see that SVB is now FDIC-operated. I wonder, should the institution designed for insuring bank deposits run a bank that services clients whose profession is speculation?
If you already have an investment advisor congratulations. However, if you’d like to learn more about what investment advisors do for their clients, don’t hesitate to contact me at empiriKalpartners.com for an individual assessment.
Edward Vela is an Investment Advisor and Estate Planning Specialist at empiriKal partners, llc©, with 15 years of wealth management experience. He earned a Journalism Certification from the University of Massachusetts, a BA in Political Science, a Financial Planning Certification at UCLA, and an MBA from the UCLA Anderson School of Management. You can contact Edward at 925-300-8805 or email edward@empiriKalpartners.com.
