Silicon Valley Bank Insolvency
California-based Silicon Valley Bank was shut down by the U.S. regulator last Friday. Gutmann clients are not affected. We hold neither shares nor bonds in this US bank.
On March 10, the US authorities declared Silicon Valley Bank SVB insolvent. Founded in 1983, the bank is #16 in the USA with total assets of $200 billion. This makes SVB the largest bank failure since Washington Mutual in 2008. In the Gutmann portfolios, we are invested in selected systemically important US banks. It is precisely these banks where concerned SVB clients transferred their funds. However, the general uncertainty led to broad stock price losses for all listed financial institutions last Friday. The U.S. Federal Reserve announced yesterday (Sunday) that all deposits will be fully protected. Thus, we do not expect a domino effect like after the Lehman bankruptcy in 2008.
Classic management failure
The mistake made by SVB's management is as old as banking. Anyone who raises short-term funds in order to invest them for the long-term is taking on high risks. This asset-liability mismatch becomes apparent when clients withdraw their deposits. This is exactly what happened last week, and a veritable bank run developed. It was not the quality of the loans or investments that doomed SVB. SVB invested in mortgage-backed securities with a maturity of more than 10 years. After interest rates rose sharply in 2022, the prices of these long-dated securities fell sharply. As they were designated as financial instruments to be held to maturity, the lower price was not an immediate problem. This only arose when deposits were withdrawn, which had to be financed by sales in the bond portfolio. SVB's deposits were also different, structured differently from the large U.S. universal banks. These have many small deposits that are covered by deposit insurance, which in the U.S. is $250,000. At SVB, however, 97% were over the deposit insurance limit. This made the institution very vulnerable to a bank run.
SVB was an important banking connection of numerous startups. These young companies would have been affected by the bankruptcy if not all deposits had been paid in full. In any case, Gutmann is not invested in venture capital and would therefore not have been affected.
Focus on the business model
The normalization of the interest rate landscape is basically good for the traditional banking business, as the interest margin improves. The interest margin is the difference between the lending rate and the deposit rate. However, SVB's situation shows that a superficial analysis is not enough. Neither SVB's core capital ratio nor its rating were a cause for concern. The Gutmann equity team therefore focuses on bank shares whose quality goes beyond purely quantitative considerations.
Yields drop in response
Bond markets in the U.S. reacted immediately to the situation. Expectations of future interest rate hikes diminished and bond prices rose. For example, the rise in the price of 2-year U.S. Treasury bonds was among the strongest in the last 40 years.
Please contact your client relationship manager if you have any questions about this or would like to discuss your individual investments.
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