Much has been said and written about the failure of the Silicon Valley Bank. What follows is our summary of the causes and the likelihood of contagion. We are relying on the research and insights of Morningstar Investment Management, March 2023 “Investment Insight”; J.P. Morgan “Eye on the Market”, March 10, 2023; and Capital Group, “Quick Take: Views on the collapse of SVB Financial”, March 15, 2023.

The Problem: According to J.P. Morgan, a significant reliance on institutional and venture capital deposits as opposed to more traditional retail deposits was a problem. Then, those deposits were used to fund loans and to buy longer-term (e.g., 10 year) U.S. Treasuries and mortgage-backed securities. When interest rates rose in the last year or so, the value of these longer-term bonds shrunk as they had lower yields than newer bonds issued at now higher rates.

As the institutional and venture capital depositors began withdrawing more and more of their deposits, a run on the bank resulted from a short supply of cash to meet deposit outflows. Banks, generally speaking, aren’t required to carry enough cash to cover withdrawals of 100% of deposits in a short time period. Morningstar compares this situation to gym memberships. If every member went to visit the gym at the same time, not everyone would have access. The current value of Silicon Valley Bank’s U.S. government securities, due to rising interest rates and lower bond prices, was not enough to meet the withdrawal demand.

Meanwhile, according to Capital Group, the government has stepped in to loan money for up to one year to other banks that pledge their U.S. Treasury and mortgage-backed securities as collateral.

The Expectations: None of the sources that we have cited expect the Silicon Valley Bank experience to spread. Yet, Morningstar doesn’t believe that we are entirely “out of the woods” although it views the regulatory response as appropriate. Similarly, Capital Group analysts and portfolio managers view the SVB failure as “idiosyncratic” while expecting further regulations, particularly for small and medium sized banks. They see the bigger banks as more diversified, well capitalized and liquid while subject to more stringent regulations. Keep in mind, however, most didn’t see this bank failure coming.

Finally, I would carefully choose my sources of information. There is no shortage of media outlets that benefit from spreading fear not facts.

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