By now, you are probably aware that the past week has seen the first bank failures since the Financial Crisis of 2008. When Silicon Valley Bank (SVB) failed last Friday, it was the 16th largest bank in the United States, with assets exceeding $200 billion. Over the course of four decades, SVB had become the tech sector's preferred bank. Its deposits grew especially rapidly since 2019, in the wake of the COVID epidemic stimulus and consumer investment in technology (SVB's balance sheet grew by approximately 250% in that time). Unfortunately, a series of poor investment decisions ultimately led to the bank's demise.

 

Here's what led to Silicon Valley Bank's collapse:

 

 

On Sunday, Signature Bank of New York became the second bank to fail due to a liquidity crisis when state regulators announced its closure. With almost a quarter of its $110 billion in assets from the cryptocurrency sector, it was also heavily involved with technology companies. Together, these failures represent the second and third-largest bank failures in U.S. history, trailing only the 2008 failure of Washington Mutual.

 

What do these bank failures mean for the financial sector and overall economy?

 

Naturally, many investors are wondering if this is the beginning of another financial crisis. While we cannot definitively answer that question, we do know there are reasons to believe it will not.

 

Looking ahead

 

Many uncertainties remain for both the technology and banking sectors. Technology companies, especially the early-stage group, have already been negatively impacted by inflation, rising interest rates, and the threat of economic recession. However, the government's actions to insure all deposits of the banks have helped ease concerns over their access to cash. Since the announcement was made, QQQ, an exchange-traded fund that tracks the technology-heavy Nasdaq-100 Index is up 4.17%.

 

Unfortunately for the banking sector, the same could not be said, as most bank stocks fell further through Wednesday. Indices of both large money-center and regional banks are down close to 25% over the past week. We could easily see other banks who made similar errors with their deposit base and/or investment portfolio fall prey to the same stress that brought down SIVB and SBNY. While clearly concerning, this could also become an investment opportunity in well-capitalized financials with a strong brand and management. 

 

We should also consider the possibility the sudden failures of these two large financial institutions, along with the recognition that there may be others with similar issues, may cause the Fed to reevaluate its plan to continue raising rates.

 

A note on Charles Schwab

 

We are keenly aware that Schwab Bank's sweep money market fund is where some of our clients' cash is held. However, the vast majority of our cash holdings reside in "position-traded" money markets that are not part of the Schwab Bank portfolio.

 

Early articles shared concerns regarding the bank's longer-dated "Held to Maturity" portion of its bond portfolio. Since then, however, analysts from several major firms have noted Schwab's strong liquidity position.

 

The bank said Monday it had "access to significant liquidity," including an estimated $100 billion of cash flow from cash on hand, portfolio-related cash flows, plus new assets. It is also important to note that approximately 82% of deposits held by Schwab Bank are insured, falling under the Federal Deposit Insurance Corporation's limit of $250,000. As mentioned earlier, this significantly contrasts SVB's insured deposits by approximately 15%.

 

The bank liquidity issue continues to evolve. First Republic and Credit Suisse have both been battered by rumor and market volatility. This is nothing new for the Swiss bank. It has struggled for several years. First Republic's issues are, however, closely related to Silicon Valley Bank’s.

 

We will continue to monitor the situation and provide more information as appropriate. In the meantime, please don't hesitate to contact us if you have additional questions or concerns.  

 

Sincerely,

 

Your CCA Team

 

 

 

 

 

 

 

 

 

 

 

Disclosures

 

Advisory services offered through Cravens & Company Advisors, LLC, an SEC Registered Investment Advisory Company.  Securities offered through and advisory services may also be offered through, FSC Securities Corporation, an Independent Registered Broker/Dealer.  Member FINRA/SIPC. Not affiliated with Cravens & Company Advisors, LLC.

 

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