Given the news headlines surrounding Silicon Valley Bank, I want to provide you with a market update. This should arm you with the right information and to let you know our stance regarding your financial progress.
We will write separately regarding Credit Suisse / UBS once the position becomes clearer we have had time to digest the impact.
Ultimately, we’re well positioned and don’t recommend any action. The recent news has been quite complex though, so I’ll do my best to update you on recent developments in clear terms without the jargon.
First, how did the bank collapse?*
- Silicon Valley Bank was doing well in the tech boom. It enjoyed a huge increase in deposits following covid as the tech sector boomed, with the money held on deposit with SVB tripling between 2019 and 2021. The bank had to put this money to work.
- The size of the deposits became sizeable, so they invested a large portion in long-term bonds earning approximately 1.56% for 10+ years. This saw positive gains for a while, as the 1.56% rate was above the deposit rates, but it quickly unfolded.
- As interest rates increased, with the amount SVB paid to deposit holders grew to 4.50% per year for start-ups. This was considerably beyond the 1.56% they were receiving on the bonds. The assets they held in bonds also fell in value, creating a double hit.
- In response, SVB tried to prop up their balance sheet by selling assets. People became skittish and quickly withdrew their money, creating a classic bank run. SVB was left with no liquidity and major losses, forcing them to default.
If you’d like to know about it in more depth, there is a lot of information out there, but this piece from Morningstar is a great starting point.
What are the salient points you need to know?
I’ll try to cover the major issues you should probably care about below:
- Do we hold any exposure to SVB in your portfolio? The bank was listed on the NASDAQ stock exchange, so many investors had some minimal exposure to the bank via their U.S. funds or exchange-traded funds. In our case, exposure is tiny and insignificant, so we don’t expect a material impact directly from the SVB collapse.
- Could this spread to other banks? For the majority of investors, this is the biggest question. We’d argue that while the rapid rise in interest rates has caused some short-term losses for the banking industry that are meaningful, but they are better positioned to weather the storm. We also believe the regulatory response from the authorities has been quick, unified, and substantive. In the short term, we’d not be surprised to see market volatility remain elevated, reflecting the increased uncertainty around potential outcomes, but most banks have much more diversified sources of funding and lend to a much wider range of industries.
- Is it isolated to technology and crypto-related businesses? Not necessarily, but this industry is significantly more exposed, as many companies operate with negative cashflows that require ongoing funding. If the funding dries up, this can cause severe stress.
- Will taxpayer funded bailouts occur? The short answer is that we don’t know. Liquidity support is being offered to protect the banks customer base, but this has been part of the role of central bank authorities for many years and one with which they are familiar.
- What portfolio actions make sense right now? At the core, we hold a wide range of assets that are diversified by sector, industry, and designed to navigate broad risk factors. As long-term and wisely-contrarian investors, this type of setup is one that we’d hope to begin finding opportunities, but it is worth remembering the risk taken.
My three biggest responsibilities
In situations like this, we have three responsibilities. The first is to support you in helping you understand what matters and what doesn’t. The second is to ensure we and our underlying investments are monitoring risks and investing in line with your risk tolerance. And third, we want to find opportunities to reach your goals faster, come what may. Our actions are always oriented toward your financial plan and making decisions consistently over time.
Regards,
John Sangster
Head of Investments
*Note: the data quoted is available in SVBs public filings at https://ir.svb.com/financials/sec-filings/default.aspx and the 4.5% deposit rate is quoted from https://www.svb.com/startup-banking.
Important Information
Past performance is not a guide to future returns. The value of investments may go down as well as up and an investor may not get back the amount invested. The information, data, analyses, and opinions presented herein are provided as of the date written and are subject to change without notice. Every effort has been made to ensure the accuracy of the information provided, but RPG Chartered Financial Planners makes no warranty, express or implied regarding such information.
RPG Chartered Financial Planners is a trading style of RPG Consulting Limited which is authorised and regulated by the Financial Conduct Authority (FCA) under number 190539. You can find RPG Chartered Financial Planners on the FCA register by clicking here. Registered in England & Wales. Company number: 06816486. Registered Office: The Copper Room, Deva City Centre, Trinity Way, Manchester, M3 7BG.
