Examining What Happened With Silicon Valley Bank

Telemus Weekly Market Review March 6th - March 10th, 2023

The S&P 500 sold off -4.6% this past week with most of the decline coming from Thursday and Friday’s sessions. The driver of the downtrend was the failure of Silicon Valley Bank (SVB), a San Francisco based bank that catered to the venture capital community. SVB’s $173 billion of deposits¹ mark the largest bank failure since 2008. However, unlike the Great Financial Crisis, SVB’s failure was not the function of credit issues, or poor lending practices, but was the result of an old-fashioned run on the bank. 

A liquidity fueled run on the bank can occur quite quickly, the mechanics of which bare some discussion. As a refresher, banks take in deposits and then either loan out those dollars or purchase liquid securities such as Treasury bonds, mortgage-backed securities, or municipal bonds. The liquid securities serve as a means of earning interest income while also having a source of easily redeemable investments that can be used to meet depositor withdrawals or fund loan commitments. The sharp rise in interest rates over the past year has resulted in the bonds on bank balance sheets declining in price. For SVB, they had more recently been faced with an uptick in requests from customers to withdrawal cash, which resulted in the need to sell some liquid securities and realize losses in their bond portfolio. The realized losses created a need to raise capital (i.e., sell additional equity) to shore up their balance sheet. SVB’s press release from Thursday regarding the plan to raise capital caused fear among depositors and investors, thereby accelerating the outflow of deposits from SVB. The swift downward move in the company’s stock and associated fears regarding the ability to satisfy withdrawal requests ultimately led to a lack of investor interest in the capital raise, pushing the bank to consider other alternatives. By mid-day Friday, the only choice for SVB was to be taken over by the Federal Deposit Insurance Corporation (FDIC). 

In this particular bank failure, there were several factors unique to SVB that created such a challenging predicament. First, SVB had a concentrated customer base of venture capital and private equity investors tied to Silicon Valley. More specifically, as of Q3 2022 half of the bank’s deposits were from corporate customers or venture funds tied to the technology sector. They also had a customer base that was geographically more concentrated in the San Francisco Bay Area. In addition, SVB had less diverse funding sources and was more dependent on their customer’s demand deposits for funding, versus having a broader mix that would include longer-term bonds and fixed maturity certificate of deposits. In our view, what happened at SVC appears to be more isolated to the institution given its unique structure and circumstances. 

A natural reaction to the news around Silicon Valley is to have concerns of a broader contagion. While we expect the current situation to be isolated, we do want to highlight several things one can do to protect themselves and guard against the loss of capital from a bank run. Some suggestions we have include:

1. Don’t maintain more than $250,000 with a single banking institution. Cash levels above $250,000 do not have FDIC Insurance coverage. Some banking institutions, however, have ways to allocate deposit across multiple banking institutions and enable coverage in excess of the $250,000 available at a single institution. 
2. Separate near-term cash needs from longer-term excess cash. Near-term transactional cash needs are more appropriate for demand deposits at banks if they remain below FDIC minimums. Depending on the circumstances longer-term excess cash may be more optimally allocated to higher yielding short-term investments through certificate of deposits at other banking institutions or through investments in Treasury bonds or money market mutual funds. 
3. Consider shorter maturity government backed securities, such as Treasury bills. These securities are backed by the U.S. government. If they are held at a brokerage firm with SIPC insurance coverage (which Telemus custodians have), securities valued up to $500,000 are protected against the failure of a brokerage firm (although they aren’t protected from loss in market value). Telemus clients also benefit from our primary custodians maintaining additional insurance coverage in excess of the SIPC limits. 
4. Money market mutual funds and ETFs that invest in Treasury bills provide another means of gaining exposure to government backed securities. 

We recognize the uneasiness that the news around Silicon Valley Bank can cause. At Telemus we are here to help talk through your situation, ensure you have proper deposit insurance protection, and able to garner a reasonable yield on your cash.  

¹ As of December 31, 2022. Source: Silicon Valley Bank Q4 2022 earnings release. 

All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Telemus Capital cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. Investment decisions should always be made based on the client's specific financial needs, goals and objectives, time horizon and risk tolerance. Current and future portfolio holdings are subject to risk. Risks may include interest-rate risk, market risk, inflation risk, deflation risk, currency risk, reinvestment risk, business risk, liquidity risk, financial risk, and cybersecurity risk. These risks are more fully described in Telemus Capital's Firm Brochure (Part 2A of Form ADV), which is available upon request. Telemus Capital does not guarantee the results of any investments. Investment, insurance and annuity products are not FDIC insured, are not bank guaranteed, and may lose value. Any reference to an index is included for illustrative purposes only, as an index is not a security in which an investment can be made. Indices are unmanaged vehicles that serve as market indicators and do not account for the deduction of management fees and/or transaction costs generally associated with investable products.

Advisory services are only offered to clients or prospective clients where Telemus and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Telemus unless a client service agreement is in place. All composite data and corresponding calculations are available upon request.