by Nick Stewart
On Friday, March 10, United States regulators took control of Silicon Valley Bank (SVB) as a run on the bank unfolded. Two days later, regulators took control of a second lender, Signature Bank. With increasing anxiety, many investors are eyeing their portfolios for exposure to these and other regional banks.
Fifteen years is not long enough for most of us to have forgotten the pain of the GFC. However, while undoubtedly unnerving for investors, this is not shaping up to be GFC 2.0 as matters stand.
The failure of SVB was due to poor risk management... by SVB.
In the GFC, bank failure was widespread due to systemic issues, mainly around unsustainable home loan lending. This was accross the board.
SVB put all their eggs into one basket... in several different ways. Firstly, they specialised in tech start-ups – which brought them a lot of money via deposits in the last 2 years of prolific growth, but also means from the outset they exclusively targeted clients who were already taking a risk, in one specific sector which had a recent boom.
If you know anything about booms (dotcom bubble anyone?) you know why it’s not wise, long-term, to focus your business solely around them.
The other way they failed to properly manage risk was by investing the existing deposits, which were essentially short-term funds, in bonds with long-term yields. They did this with the aim of capturing higher returns. This went against the function they served for their clients, many of whom would be needing regular funds from those deposits, from capital raised prior, to fund their development and growth in the immediate sense.
Of particular issue with SVB’s investing strategy in this case was the fact it left them vulnerable to rate rises, in a time when the Federal Reserve has been aggressively raising rates. The yield of bonds has gone up and their cost has gone down. This wouldn’t be as much of an issue if you have the time to wait for bonds to come to maturity to collect their original face value, but if you have to sell them while their cost was down, you’re locking in that loss.
In a long-term investment plan, you would be looking at potentially taking on more risk as you have the time to weather market fluctuations. SVB did not have this time. When their customers caused a run on the bank, SVB were not able to meet their obligations as they did not have enough liquid assets when their losses became actualised.[i]
This is all underpinned by the queries around insider trading by CEO Greg Becer, who is reported to have sold nearly $30M of stock over the past two years – which wouldn’t have helped inspire the confidence needed to avoid said run on the bank.[ii]
Is this going to affect me?
Short answer – unlikely.
For one, the Federal reaction to it has been different. Rather than a bailout for the bank, the Fed has instead seized it, backstopped all SVB deposits regardless of their size, and they’re looking to sell SVB’s assets to return the lenders to the private sector and avoid the taxpayer picking up the bill.[iii]
In terms of whether your investments will be safe – if you have a well-diversified global portfolio and a robust plan, this will be but a blip on the radar. Traditional, sensible financial advice will always prevail, because while the markets may fluctuate, it doesn’t ultimately depend on trends and bubbles for success.
Nobel laureate Merton Miller famously used to say, “Diversification is your buddy.” Thanks to financial innovations over the last century in the form of mutual funds, and later ETFs, most investors can access broadly diversified investment strategies at very low costs. While not all risks—including a systemic risk such as an economic recession—can be diversified away, diversification is still an incredibly effective tool for reducing many risks investors face. In particular, diversification can reduce the potential pain caused by the poor performance of a single company, industry, or country.
As of February 28, SVB represented just 0.04% of the Russell 3000, while regional banks represented approximately 1.70%. For investors with globally diversified portfolios, exposure to SVB and other US-based regional banks likely was significantly smaller. If buddying up with diversification is part of your investment plan, headline moments can help drive home the long-term benefits of your approach.[iv]
When the unexpected happens, many investors feel like they should be doing something with their portfolios. Often, headlines and pundits stoke these sentiments with predictions of more doom and gloom. For the long-term investor, however, planning for what can happen is far more powerful than trying to predict what will happen.
If you’re after a more in-depth chat with the experts about your financial plan and investment options, reach out to a trusted financial adviser today.
Nick Stewart (Ngāi Tahu, Ngāti Huirapa, Ngāti Māmoe, Ngāti Waitaha) is a Financial Adviser and CEO at Stewart Group, a Hawke's Bay-based CEFEX certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver scheme solutions.
The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz
[i] https://www.servowealth.com/blog/svb-and-sensible-investing
[ii] https://www.cnbc.com/2023/03/14/svb-execs-sold-84-million-of-the-banks-stock-over-the-past-2-years.html
[iii] https://www.reuters.com/business/finance/us-regulator-taps-piper-sandler-new-bid-sell-silicon-valley-bank-sources-2023-03-15/
[iv] https://my.dimensional.com/when-headlines-worry-you-bank-on-investment-principles
