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Thoughts on Silicon Valley Bank And New Federal Depositor Backstop

By Trust Company of the South


On Friday, March 10, the FDIC took over SVB Financial Group, more commonly known as Silicon Valley Bank. The 40-year-old bank had become the 16th largest bank by asset size in the United States and had specialized in lending to venture capital and tech-related companies.

In the weeks leading up to Friday, many of SVB’s tech customers had been withdrawing deposits to address their own cash needs. Because of these withdrawals, SVB was forced to liquidate a portion of its bond portfolio, and because of last year’s run-up in interest rates, these bonds were sold at a substantial loss, resulting in a need for SVB to raise capital. Unfortunately for SVB, this news resulted in additional deposit withdrawals and the company could not survive.

There was a lot of speculation this weekend about the SVB depositor situation and the potential for knock-on effects on the broader banking system. Late Sunday, regulators took control of another financial institution, Signature Bank, and then announced a major new program to fully protect all uninsured US depositors. Here is what we know so far:

  • While SVB equity and unsecured debt holders will not be rescued, 100% of FDIC-guaranteed deposits will be available on Monday, March 13.
  • Additionally, all of SVB’s non-guaranteed deposits (about 90 percent of total deposits) will also be available on Monday.
  • Similarly, depositors at Signature Bank, which was closed by New York state regulators, will also have access to their deposits on Monday.
  • The Federal Reserve and the US Treasury have created a new funding mechanism to offer full protection of all uninsured deposits in the United States. The new Bank Term Funding Program allows financial institutions to borrow from the Fed for up to one year and receive par value for Treasuries, agency debt, mortgage-backed securities and other qualifying assets pledged as collateral. In a statement, the Fed indicated that it did not anticipate that it would be necessary to draw on these backstop funds. In addition, the Fed eased lending terms for banks via the discount window.
  • The new Bank Term Funding Program appears to be designed to prevent additional banks from having to crystallize Treasury portfolio losses caused by higher interest rates.
  • The FDIC is holding an auction today, Sunday, March 12, that could result in a corporate acquisition of SVB’s remaining assets and liabilities and would effectively conclude that particular matter entirely.

As this relates to the broader banking system, we observe that the SVB failure is quite unlike what happened during the Great Financial Crisis in that this was not a banking credit default; it was an insolvency brought on by forced selling of discounted long-term Treasury bonds. This is an important distinction. During the Great Financial Crisis, fears over crumbling credit related to the housing market impacted all financial institutions and extended to money market mutual funds, one of which, the Reserve Primary Fund, could not meet its obligations. That is not what this is.

Less is known at this time about the events leading up to the Signature Bank failure, though Signature counted a number of cryptocurrency companies as customers and had been pulling back from that industry.

As this relates to Trust Company of the South, there is zero impact on the money market mutual funds in our managed client portfolios. While money market mutual funds are investment products and are therefore not explicitly guaranteed by the FDIC, the Blackrock fund employed by Trust Company invests at least 99.5 percent of its total assets in cash, US Treasury bills, notes and other obligations issued or guaranteed by the US government.  Therefore, even if this were a corporate credit crisis, the BLF FedFund would be unaffected.

For Trust Company clients with alternative investments in managed portfolios, there could be small exposure to SVB through venture capital managers who invested in companies which banked with SVB, although at this time we are not aware of material direct exposure, especially after the combined actions of the Federal Reserve and the US Treasury.

We continue to monitor the situation carefully and we will provide updates as necessary. Please do not hesitate to reach out with any questions.

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