You may have seen news of the recent collapse of Silicon Valley Bank (SVB), Signature Bank and Silvergate.
Following the announcements, we wanted to provide you with the latest Rathbones commentary from Phil Wyatt, Investment Director at Rathbones, written 14th March, 2023.
You will have seen the news of the recent collapse of Silicon Valley Bank (SVB), Signature Bank and Silvergate and I wanted to provide my thoughts on this. With regards to the most prominent of these [collapses], SVB [Silicon Valley Bank], in contrast to many previous bank failures, wasn’t primarily a story about risky lending to borrowers with poor credit quality. Instead, it was mainly due to SVB’s inability to meet customer demands for withdrawals. The securities they purchased (bonds) in order to safeguard customer deposits fell significantly in value due to the high pace of interest rate rises we have seen this past year or so. As SVB did not hedge against the risk of interest rates rising (and therefore bond prices falling), they have been caught short. SVB also had a concentrated deposit base, with few retail deposits and most accounts well over the government deposit insurance threshold. That probably increased the speed at which customers moved to withdraw their funds as they wanted to be sure they could get all their money back.
Over the weekend, the smaller New-York based Signature Bank also failed. Signature shared some of SVB’s vulnerabilities, including a concentrated deposit base and high share of uninsured deposits. It also had significant exposure to cryptocurrency firms, which is where Silvergate came unstuck.
It is important not to understate the possible impact contagion could have / is having on markets in the short-term, but the banks we own are large international banks with a much more diversified businesses, as well as significantly stronger balance sheets. Perversely, it is these large international banks that have been penalised since the GFC [Global Financial Crisis] and been made to shore up their balance sheets in order to prevent a full-blown financial crisis; this gives us comfort that they should be able to weather this current storm relatively well, albeit share price movements in the coming days may continue to be volatile.
An unexpected outcome of this is the possibility that the Federal Reserve will be forced to pause their rate hikes at next week’s meeting, so that they may gauge what the fallout from this is. The reason we find ourselves in this situation is precisely because of the pace of interest rate rises being its fastest since the 1980s and so inevitably, it has broken something. Banking lending is likely to tighten further which could bring about a recession sooner than expected, but a recession has been our base case for a while and that is why we have preferred to remain defensive despite the rally in equity markets this year. A pause by the federal reserve will eventually be positive for both bonds and equities, and so remaining invested is key.
As always, if you would like to discuss any of your financial investments, please get in touch with us.
Best regards,
Radcliffe & Co