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The swift collapse of Silicon Valley Bank (SVB) last week has reverberated through the banking industry, scaring regional bank customers and sharply lowering stock prices for this sector. So low, in fact, that on Monday and Tuesday many investors were buying bank stocks because they were on sale.
A Brief Summary of the Silicon Valley Bank Story
SVB received a large number of deposits in 2021, as their niche client base of startups received funding. At that time, interest rates were at a historical low, and SVB’s bank management chose a risky strategy of investing in long-term bonds; when interest rates eventually rose, as expected, the prices of those bonds fell. Borrowing short and lending long is a confidence game. Depositors may access their money at any time—but not everyone can access their money at the same time.
Last Wednesday, March 8, the SVB CEO announced that they lost money on this poor investment and his intention to raise capital to ease liquidity fears. But instead of calming customers, this action had the opposite effect. Why? Customers of SVB are startups, and VCs who invest in them stay on top of the news. Many VCs told their startup founders to pull their money out of SVB after the announcement, and their founders did so swiftly, via electronic transfer. Banking relies on confidence in the institution. When too many depositors withdraw at the same time, there’s not enough cash to go around, and you wind up with a high-tech version of the bank-run scene in “It’s a Wonderful Life.” On Friday, March 10, the FDIC seized the bank.
Then, on Sunday, March 12, the Federal Reserve and Treasury stepped in and promised to make all depositors whole, i.e., even those with more than $250K at SVB would get all their money back. This was a smart move that likely prevented failure-inducing runs on other banks. It also fosters healthy competition and low prices for all depositors, whether they’re with small banks or “too big to fail” institutions. Since the Treasury will get the bank’s assets, including those long-term bonds that they can hold to maturity and, thus, won’t take a loss, it’s not a bank bailout.
Confidence in the banking system and the stock market is crucial for a functioning economy. Investigators are looking into what went wrong, but it appears there was no fraud, and the bank assets are not missing.
What happened is a case of management error, or mismanagement. SVB’s directors are tainted forever, and the bank’s shareholders have been wiped out. But its depositors will be made whole.
How Does a Bank’s Stock Price Affect You?
While the price of many bank stocks has dropped significantly, due to contagion from the SVB situation, it’s important to note that a bank’s stock price is not the same thing as your deposits at that bank. Bank accounts are insured up to $250K per depositor, per insured bank, for each account ownership category. If you have more than this amount at any one bank, consider spreading your money across multiple banks, or working with your advisor to determine if you really need to hold that much cash.
Is This 2008 All Over Again?
We believe things are very different than they were in 2008. Back then, there was a liquidity crisis. Today, in the case of SVB, the actions of one bank’s management caused that bank to fail.
As to why other bank stocks have had their share prices hammered, including First Republic Bank—an institution that caters to high net-worth individuals, many in the Bay Area where SVB operated—we believe this is a result of contagion. Additionally, some VCs and entrepreneurs (who are neither banking nor wealth management experts) sounded a false alarm on Twitter about other small banks. But First Republic’s management does not appear to have placed bets on long-term bonds when interest rates were at a historical low and then sold the position at a loss, and its client base is more diversified, less concentrated in startups and tech.
Your Investment Portfolio
This past Monday, Founder Charles Schwab and CEO Walt Bettinger published Our Perspective on Recent Industry Events. In it, they discuss the $80 billion in borrowing capacity available to the Charles Schwab Corporation, and the FDIC insurance coverage for clients at Schwab Bank. We encourage you to read it.
Contrast Schwab’s more than 34 million diverse account holders with the customers at SVB, the majority of whom were involved in startups for another reassuring point of differentiation.
Does Your Portfolio Have Exposure to SVB or Signature Bank (SBNY)?
Dimensional portfolios are broadly diversified, and individual security weights in the portfolios are linked to market capitalization weights, which reflect the latest market assessment of the trade-offs between expected returns and risks. Broad diversification helps reduce idiosyncratic exposure to any single stock and can be critical to capturing the premiums associated with company size, relative price, and profitability. (Dimensional’s fixed income funds do not have any exposure to Silicon Valley Bank or Signature Bank.)
As of January 31, 2023, Dimensional’s US-domiciled domestic equity funds with direct holdings of SVB Financial and Signature Bank were as follows:
- U.S. Core Equity 2 Portfolio (DFQTX) 0.10%
- U.S. Core Equity 1 Portfolio (DFEOX) 0.08%
- U.S. Core Equity 2 ETF (DFAC) 0.09%
- U.S. Marketwide Value ETF (DFUV) 0.03%
- US Targeted Value ETF (DFAT) 0.01%
- US Large Cap Value Portfolio (DFLVX) <0.01%
SVB Financial and Signature Bank have been closed and are not currently trading. The above funds are held in JLFranklin client portfolios, although no clients hold all of these funds and generally only one or two of the above funds are held by any one client, based on asset allocation.
Dimensional’s traders continue to monitor the situation and follow their normal, flexible investment approach that balances a daily consideration of expected returns, diversification, and risk.
Schwab Bank
Many of our clients hold cash at Schwab Bank. If you are unhappy with your bank or simply want to consolidate your banking relationship with your investment custodian, let us know and we can assist you in opening a Schwab Bank account. Schwab Bank offers checking, savings, credit card, and fee-rebate ATM services, and our team can assist if you run into any issues.
In Summary
We are not making any changes to portfolios as a result of SVB’s demise and the bank stock price drop. And we hope this note eases any anxiety you may be feeling. If you want to talk, please reach out.
