We want to touch on the recent news of Silicon Valley Bank’s failure, and what it means for the market.
For many, the phrase “bank failure” immediately brings back memories of the 2008 financial crisis. However, it’s important to note that the Silicon Valley Bank failure is not a repeat of 2008.
Silicon Valley Bank was the 16th largest bank in the country, holding approximately $209 billion in assets. It specialized in dealing with start-up tech companies, and during the pandemic, it received tens of billions in new deposits which it invested in U.S. Treasury bonds. Unfortunately, while Treasury bonds are considered safe, they are sensitive to fluctuations in interest rates. As inflation hit a multi-decade high last year, the Fed hiked interest rates leading to significant declines in bond values.
As investors and depositors became nervous about its financial position, Silicon Valley Bank faced a classic run on the bank. The government stepped in and took control of the bank’s remaining $175 billion in customer deposits ultimately guaranteeing all deposits, including those amounts above the $250K FDIC insurance limit.
What’s different from 2008, is that the underlying investments the bank made were not subprime mortgages, but treasury bonds, which are backed by the federal government. We fully expect that those bonds will be repaid in full, so our financial system is in a much stronger position and we don’t expect anything resembling the crisis we saw in 2008.
Still, the bank run has caused concern for many investors. Shares of banks with similar business models have fallen sharply over the last few days, bringing more issues to the surface including the more recent acquisition of Credit Suisse by UBS.
At this time, it’s important to remember that the economy remains in good health, and we continue to monitor the situation closely.
Thank you for your continued trust.
Mark J. Snyder