Silicon Valley Bank Run
Panic in the Valley:
The S&P 500 fell last week as trouble in the banking sector pushed the Federal Reserve policy to the background and bank liquidity to front page news. The S&P 500 fell -4.5%, with all sectors in the red. The banks led the week losses down -11.5%, with the smaller regional bank group the worst sub-sector.
Troubles at crypto lender Silvergate early last week and a liquidity-driven failure at venture capital and early-stage technology focused Silicon Valley Bank (second largest failure in US history) caused the late week selloff.
Much of Silicon Valley Banks (SIVB) issue was a function of the surge in interest rates caused by the pace of Federal Reserve interest rate increases in 2022.
Rising interest rates coupled with an oversized uninsured depositor base that was already strapped with negative cash flow from funding early-stage start-up company losses caused their rapid demise. From 2020 through 2022, behind a surge in IPO’s, SIVB took in tens of billions of dollars from its venture capital clients in deposits.
SIVB then took the cash and invested into longer-term Treasury and mortgage bonds. It appears, that the maturity of the portfolio in question was around 3.5 years in duration, not particularly long, likely matching what management believed was the rate of cash flow bleed from their technology start up clients.
Mid last week, Moody’s rating agency messaged concerns to SIVB management prompting SIVB to raise capital quickly. SIVB was unable to do so. In the end, SIVB’s, largest venture capital depositors, the ones that SIVB had back for decades, were instrumental in the banks quick demise and shutting.
The S&P 500 ended Friday 3,862 down from last week’s closing level of 4,045. The index is still in positive territory for 2023, but its year-to-date gain has dropped to only +0.6%.
The index began lower last Tuesday after Federal Reserve Chair Jerome Powell said recent economic data was stronger than originally forecast, suggesting interest rates will rise beyond what was anticipated. Monday March 13th morning action is saying the Fed interest rate cycle is coming to an end quickly as banking issues are disinflationary to the economy.
All sectors fell last week, led by the financial sector dropping -8.5% amid the collapse of Silicon Valley Bank. Materials dropped -7.6%, real estate was down -7%, consumer discretionary lost -5.6% and energy lost -5.3%.
Interesting Articles on SIVB:
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Previously Released YouTube video in 4q22 on the Federal Reserves Balance Sheet and Commercial Banking losses: Federal Reserve Balance Sheet, Commercial Banking, and my Nightmares.
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