What Can I Learn From The Fall Of Silicon Valley Bank?

If you have not already known, the biggest black swan event that happened in the past week was the collapse of Silicon Valley Bank (SVB) on Friday, 10th March 2023.  This was actually preceded by the fall of Silvergate Bank SGB), followed by the seizure of Signature Bank (SB) 3 days later on 13th March 2023.  In case you did not already know about it, here's a brief summary about the background of SVB, and the timeline of how SVB collapsed in a matter of just 48 hours.

Background of SVB (according to Wikipedia):

"Silicon Valley Bank (SVB) was a commercial bank headquartered in Santa Clara, California.  SVB was the 16th-largest bank in the United States at the time of its failure on March 10, 2023, and was the largest bank by deposits in Silicon Valley.  It was a subsidiary of the bank holding company SVB Financial Group.  As a state-chartered bank, it was regulated by the California Department of Financial Protection and Innovation (DFPI) and was a member of the Federal Reserve System.  The bank operated from offices in 13 countries and regions.

In 2015, the bank stated that it served 65% of all U.S. startups.  Its new offerings at the time included syndicated loans and foreign currency management, and it stood out as the only U.S. financial institution then working with virtual currency startups.  SVB was the finance partner during the launch of Stripe's Atlas platform in February 2016 to help startups register as U.S. corporations.

As of December 31, 2022, 56% of its loan portfolio were loans to venture capital firms and private equity firms, secured by their limited partner commitments and used to make investments in private companies, 14% of its loans were mortgages to high-net-worth individuals, and 24% of its loans were to technology and health care companies, including 9% of all loans which were to early and growth-stage startup companies. Silicon Valley Bank required an exclusive relationship of those borrowing from the bank."  

Timeline of SVB's Collapse:

"March 8: The bank sold about $21 billion of securities from its portfolio with a plan to reinvest the proceeds, which will result in an after-tax loss of $1.8 billion for the first quarter.  The bank also announced offerings for $1.25 billion of its common stock and $500 million of securities that represent convertible preferred shares, Bloomberg reported.

March 9: The SVB shares plunged by 41 per cent, their biggest decline since 1998.  The slump in their shares came after SVB announced that it had sold all of the available-for-sale securities in its portfolio and updated its forecast for the year to include a sharper decline in net interest income.  The SVB Financial Group's CEO Greg Becker advised clients to stay calm amid concern about the lender's financial position.

March 10: Prominent venture capitalists advised portfolio businesses to withdraw their money from the Silicon Valley Bank. This on a day when the shares of SVB were halted after a sharp sell-off in premarket trading.  The stock was trading at $63.99 before the bell and was on course to open at its lowest in more than a decade, if current losses held.  US treasury secretary Janet Yellen said, "There are recent developments that concern a few banks that I am monitoring very carefully".

March 10: California regulator shut Silicon Valley Bank and appointed the Federal Deposit Insurance Corporation as receiver, Reuters reported.  This day after the shares of the bank were halted after tumbling 66 per cent in premarket trading."

Both SGB and SB were smaller banks compared to SVB, while SGB (mainly) and SB (partly) are involved in crypto assets.  Since I had sold all my crypto holdings in mid-November 2022, I am not too worried about their impact on crypto prices (conversely, the crypto prices are shooting through the roof these few days, so, too bad for me).  However, the collapse of SVB will have a greater impact on the general public.  Since most of it's depositors were startups and venture capitalists, the fall of SVB may mean the liquidity crunch, which may lead to the fall of startups, small and medium enterprises (SME), resulting in massive layoffs.

In a turn of events, in the morning of 13th March 2023 (Singapore time), US government has announced that the federal regulators will safeguard all deposits at SVB, including money that is not normally covered federal deposit insurance, with the launch of Bank Term Funding Program (BTFP).  

"BTFP was created to support American businesses and households by making additional funding available to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors.  The BTFP offers loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral.  These assets will be valued at par.  The BTFP will be an additional source of liquidity against high-quality securities, eliminating an institution’s need to quickly sell those securities in times of stress."  

This is definitely great news for all affected business, as it meant that their deposits can still be retrieved, and payments can be made.  However, when exactly the full sum can be retrieved, that is another story.  Nonetheless, in short, the current crisis has been averted near term.

Overall, it seems like this black swan event is a regional issue, but deep beneath the surface, are there contagion effects that may further shock the financial markets worldwide in time to come?  I think regardless if there's any near term direct impact on me, I believe there are lots that I can learn from this event.

Lesson #1: High Interest Rates are Not Always Good for Banks and Financial Institutions.

With the quantitative tightening and raising of interest rates going on hand in hand, liquidity in the markets are very tight.  This has already let us experienced the volatility in the markets, and the negative impact it creates for the technology sector and REITs.  Now with liquidity from venture capitalists "locked up", that will create more fear in the markets, as seen in current turmoil and onslaught happening all over the global markets.   This event also illustrate to us that, when interest rates reaches a certain level, the negatives (such as bad loans or bad investment choices within the banks and financial institutions) created for the banks may outweigh the positives (such as net interest margins and profits), causing undesirable impact on banks and financial institutions.  This can be seen in the declining share price of the 3 local banks, namely Development Bank of Singapore (DBS), Oversea-Chinese Banking Corporation (OCBC) and United Overseas Bank (UOB) over the past month.  Although the implementation of BTFP seems to stem the liquidity crisis for now, but investors remain jittery towards the financial sector for now.  

Lesson #2: Decline in Interest Rates due to Financial Turmoil are Not Good News for REITs.

Although REITs are highly leveraged investment assets, which made that highly sensitive to interest rates, it is important to note that REITs are not solely impacted by interest rates.  In times of financial turmoil or recessions, the unprofitability of companies/ tenants of these REITs may face difficulties paying rent and thus in turn impact the REITs.  In fact, these concerns are more worrying than the interest rates issue, as most Singapore REITs are financially prudent and has locked in the majority of their leverage into fixed rates.  However the insolvency of their tenants, and the inability to secure new tenants due to tough operating environment during recessions will cause issues to their operating income.  This is seen in the 10-year yield, which has U-turned down from above 4% to less than 3.6% in a couple of days.  However, that did little to help to prop up the share prices of interest-sensitive REITs before the US government announced the BTFP, because the cause of the fall in yield is more worrying than the relief in cost pressures for the REITs.

Lesson #3: Quantitative Easing is the Simplest Near-Term Solution to Black Swan Events. 

As much as how the US government and FED claim that the BTFP is not a bailout of the banks, I believe almost everyone on the ground will agree that this short term solution is indeed a bail-out, and highly possibly, the beginning of the return to quantitative easing.  However, on a personal note, I do not think it will immediately lead to the FED cutting rates, but I think it will at least stop the FED from hiking rates further, and let the interest rates stay at elevated levels for longer periods, till inflation normalizes (hopefully).  

Lesson #4: Reinforcing the Importance of Diversification.

From 6th March to 13th March, the Financial Select Sector Index (IXM) plunged by 12% in a short span of 1 week!  The broader S&P 500 fell by a smaller 4.8% over the same period.  This further reinforced the importance of diversification, especially for a noob like me.  I am glad that with the diversification I had, I am not too worried about this black swan event, and I am able to remain calm and carry on my daily lives without much concern.  Just ignore all noises and all things beyond my control, and continue to build up my portfolio to grow my dividends.

Lesson #5: Keep Emotions in Check and Never Panic Buy or Sell

First and foremost, quality stocks within the portfolio is necessary.  As long as the fundamentals are not affected, just stay calm and ride through the volatility (unless you are a trader).  Based on what happened over the past week, if one panic sell on last Friday, probably one would have sold on the lowest price and stocks have rebounded on Monday.  Volatility is a friend to traders, but to long term investor like myself, it is either noise, or buying opportunity.

One thing to note is before the Fed makes any decision along those lines, the macro-conditions will still remain negative-biased.  The shockwaves remain, and we do not know exactly deep down in the books of all the financial institutions and banks, are there any unseen issues that may open the door to a larger contagion effect.  I suppose how this eventually plays out, will depend on how active or how reactive the US government and the FED will be.  For now, after the February CPI report, we can only hope that inflation is indeed taming down, so that the FED will not be in a tight spot moving forward.

Overall, the same thing applies.  Hoping for the best and be prepared for the worst.  Whether a full blown crisis is going to happen is anyone's guess.  I will just continue to hold on to my portfolio, and hope I can continue to get some dividends, and ride through the volatility or downturn (if any).  I am prepared to receive a possible decline in dividends for the rest of this year amidst all uncertainty and higher chance of recession, despite a higher dividend collected year on year for the first quarter.  With much uncertainty and pessimism, Barista FIRE, here I come...!


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