In light of the Silicon Valley Bank failure, our strategy acknowledges that we may well enter a short-term period of market volatility but will continue to be assured by the strength of the balance sheets of the financial names we hold in our clients’ portfolios.
BACKDROP
The 16th largest US bank, Silicon Valley Bank (SVB), was declared insolvent on Friday 10th March and its day-to-day operations have now been taken over by a government operator called the FDIC.
It is the 2nd largest failure in US banking history.
- The San Francisco bank was the “go-to” bank for the tech-heavy Silicon Valley industry, and saw significant corporate deposit inflows over the past 2 years as the number of start-ups flourished. This led to a significant surplus of deposits on the balance sheet when compared to the bank’s loan book.
- Normally this excess amount of money is invested in sub-12-month fixed income instruments such as short-dated US government bonds. The management at SVB, however, took a market view over the last 2 years to extend the duration profile of the fixed income book into much longer maturities. 2022 was a challenging year for global bond markets, and as yields rose sharply there were significant mark-to-market losses in the excess portfolio book.
- The past 2 quarters have proved to be a more difficult environment for the tech industry, leading to many corporates needing to draw down deposits held at SVB. The accumulating withdrawals, accelerated by the close-knit community of the tech investor deposit base, required the bank to sell part of its fixed income portfolio, resulting in realising a $1.8bn loss. This came out of the bank’s core equity tier 1 which is looked upon as its capital, and in an attempt to replenish this, SVB planned an equity capital raise of $2.3bn which proved unsuccessful. The FDIC subsequently took over the stewardship of running the day-to-day operations of the bank.
- A significant portion of customer deposits were not insured, so panic prevailed within the local industry as companies were not granted access to their deposits to pay for operational expenditures.
