March 17, 2023
The Dynamics of the Silicon Valley Bank Collapse & What You Need to Know
The news from the banking industry over the past week, and the market volatility that has resulted, compels us to reach out to share information and our perspective with you. As your trusted financial partner, we are here to answer any specific questions you may have and to reassure you that Cape Cod 5 is financially sound and is not impacted by these events.
On Friday, March 10, Silicon Valley Bank (SVB) ceased operations and entered FDIC receivership. Since then, many questions have been asked about how the $212 billion bank that had experienced significant growth coming out of the pandemic could fail so quickly. First and foremost, the factors were unique to SVB and not systemic to the banking industry. The issue was fundamentally around SVB’s unique non-diversified business model that focused specifically on the tech and venture capital industry with a highly concentrated customer base.
Although SVB’s balance sheet didn’t have credit issues, it did have a significant mismatch between its liquidity needs and that became cause for concern when they sold a portion of their bond portfolio at a significant loss and announced a capital raise that then failed. The failure was magnified by the speed with which SVB’s depositor base received, processed and acted on information.
In response to the pandemic, central banks around the globe injected trillions of dollars into the economic system. A by-product of the glut in cash was a significant increases in bank deposits along with a record number of special purpose acquisition companies (SPACs) and an explosion of venture capital backed technology start-ups. SVB was a perfect place for excess cash, which the Bank used to make loans or invest in higher yielding securities like long dated treasury bonds.
As the pandemic eased and with supplies of final goods and services disrupted, inflation took hold prompting the Federal Reserve to aggressively raise rates. At the same time the Fed embarked on quantitative tightening, essentially draining cash from the system.
Inflation, along with higher rates and a volatile stock market led to a significant reduction in the flow of capital into new tech investment thereby reducing the flow of new funds into SVB. To keep a balance of cash available for customer needs, SVB looked to their investment portfolio, which was now holding assets with substantial unrealized losses – as rates rise, the value of bonds (treasuries, agency, or otherwise) drops. The sharp spike in rates created substantial losses for SVB when these bonds were sold.
News of the bond sale, along with the Bank seeking to raise additional capital, was broadly communicated on Thursday, March 9, and an old-fashioned “run on the bank” ensued – but with a modern twist. Technology ensured the news would immediately reach a global audience – an audience that was already jittery as they had witnessed the liquidation of “crypto” bank, Silvergate, earlier in the week. Technology also allowed for an immediate reaction. With a few clicks, an account owner could initiate a transfer of funds to another institution. In the early hours of Friday, March 10, depositors pulled more than 20% of the Bank’s asset base – over $40 billion – forcing the company to shut down operations and becoming the 2nd largest U.S. bank failure in history. The news was followed by the regulatory seizure of Signature Bank over the weekend, which was another institution heavily geared to “crypto” related deposits. As is often the case, when there is a market disruption, there is speculation as to where the next problem may lie. This speculation led to significant stock price drops at many regional Banks, especially those thought to potentially have less diversified business models.
It is important for our clients to understand that Cape Cod 5’s strategy, financial position and risk management practices are markedly different than that of SVB and these other institutions. Our large and diversified customer base provides a measure of safety. The Bank’s capital ratios have been and remain well above regulatory requirements.
Rest assured, your retail bank deposits with Cape Cod 5 remain insured up to the FDIC limit of $250,000 per depositor. Since the FDIC was established, no depositor has ever lost a single penny of FDIC insured funds. Further, the Bank’s financial strength and proven stability means you can have confidence in our institution. For depositors with retail bank balances in excess of $250,000, Cape Cod 5 offers options for 100% FDIC insurance through Insured Cash Sweep and CDARs programs through our relationship with IntraFi. Our team would be happy to discuss coverage options and enrollment with you.
For our wealth management clients, we do invest in the financial services sector across multiple industries. Holdings include two banks – J.P. Morgan Chase and US Bank. On Friday, March 10, and over the weekend, the investment team reviewed balance sheet, liquidity, and loan and deposits ratios, and we remain confident in the ability of both companies to manage through the current environment. If you are an existing client and own shares in another bank, or have any questions or concerns, please reach out to your advisor. Cash equivalents (money market balances) are invested in short-term government obligations and not held by any bank.
The implications of SVB’s collapse will likely have a material impact on the Federal Reserve’s path forward. That path may include a change in anticipated rate hikes, a pause in quantitative tightening, some combination of both, or a new policy tool altogether. The situation remains fluid and we will continue to monitor it closely. The analysis of how it could have been avoided and, sadly, the assigning of blame has already commenced.
In closing, this week Cape Cod 5 celebrates its 168th birthday. Since 1855, our doors have been open to our customers and our community. That will not change. Reach out to us at any time – we are here to help.
On behalf of Cape Cod 5 Trust and Asset Management Investment Committee
Jason R. Lilly, CFA, CFP®, Chief Wealth Management Services Officer
Michael S. Kiceluk, CFA, Chief Investment Officer
Brad C. Francis, CFA, Director of Research
Rachael Aiken, CFP®, Senior Investment Officer
Jonathan J. Kelly, CFP®, CPA, Senior Investment Officer
Benjamin M. Wigren, Senior Investment Officer
Kimberly Williams, Senior Wealth Management Officer
Robert D. Umbro, Senior Investment Officer
Craig J. Oliveira, Investment Officer
Alecia N. Wright, Investment Analyst
These facts and opinions are provided by the Cape Cod 5 Trust and Asset Management Department. The information presented has been compiled from sources believed to be reliable and accurate, but we do not warrant its accuracy or completeness and will not be liable for any loss or damage caused by reliance thereon. Investments are NOT A DEPOSIT, NOT FDIC INSURED, NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY, NOT GUARANTEED BY THE FINANCIAL INSTITUTION AND MAY GO DOWN IN VALUE.
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