March 13, 2023 – Just as we were getting ready for another weekend of rain and snow in the Bay Area, a financial storm was brewing in markets with the liquidation of Silvergate Capital (crypto industry lender) on Wednesday, and then, more surprisingly, the FDIC takeover of Silicon Valley Bank (SVB) Friday morning and Signature Bank over the weekend. This morning we awoke to President Biden giving a press conference urging calm and confidence in our banking system.
Clearly something significant is happening; speculation and media coverage abound. This can cause concern and make it feel like we have to react. We don’t. Due to the signs of sheer panic we’ve observed, we’re reaching out to share a calm sense of perspective we hope you can appreciate.
It was reassuring to see the Fed, Treasury, and FDIC come together over the weekend to backstop all depositors, even those with balances above FDIC insurance limits. Our overarching view is this didn’t need to happen if level heads prevailed. Yes, banks have unrealized losses from high-quality bonds on their balance sheets due to the rapid rise in interest rates. But they were not in financial trouble like they were during the last banking crisis in 2008. While references to the 2008 Global Financial Crisis are being made, when over 300 banks failed, this is a different crisis altogether. In the case of Silicon Valley Bank, panic incited a bank run that led to liquidity and solvency issues. Signature and Silvergate were very concentrated in, and tied to, the crypto boom and bust. The banking industry, overall, is more diversified and in a much better place with less leverage, higher capital ratios, and less risk on balance sheets than pre-2008 GFC.
There has been blaming and finger-pointing, and more will come. Lessons will be learned, regulations improved, and the system strengthened even further. The one thing that’s very difficult to change is emotion-driven human behavior. The run on the bank was a crisis of confidence that spread like wildfire, creating asset and liability mismatches. It has caused stress and hardship for individuals and small businesses over a very short period of time.
The bank run mentality is similar to the short-term trader mentality you hear about in the media and on Wall Street, which is largely driven by sentiment. Because of our sufficient time horizon, we can look past the noise to focus on the long-term drivers of returns – fundamentals and valuations. We maintain a disciplined, long-term perspective rooted in research rather than a reactionary, short-term approach driven by emotion.
It is still too early to know how this unfolds. It is a good reminder on prudent liquidity management and why we recommend cash reserves for known liabilities as well as short-term high-quality bonds for unexpected liabilities. There may be more panicked selling, or even forced selling, from investors that took on too much risk. This is typical behavior and creates opportunities for patient, long-term investors.
A report on inflation (CPI) will be released tomorrow, and the Fed is meeting next week to make decisions on policy going forward. While a rate hike of 50bps was being considered, the latest events may change the course of future policy, at least temporarily. The market has already priced in much lower interest rate expectations relative to last week, and bonds are providing the ballast in our diversified portfolios to soften the impact of downside equity market volatility. Ironically, this is also helping the high-quality bonds on the balance sheets of banks that are held vs. cash deposits.
We remain confident in our ability to help navigate you through this uncertain environment. Our portfolios, and more importantly the financial plans we co-create with you, are built to withstand these types of unexpected events. That does not make them any less uncomfortable or scary, but we have conviction that you are well-positioned to weather this storm.
Know that we are here, as always, to answer any questions you may have.