Last Friday, Silicon Valley Bank (SVB) announced they needed to raise capital for liquidity purposes. In today’s social media world, some analysts and investment managers questioned their exposure to smaller upstart tech type companies. When others suggested companies doing business with them begin pulling deposits from the bank this was the equivalent of someone screaming “FIRE” or SHOOTER” in a crowded theater. Depositors then began a “run” on the bank, trying to take out their money on deposit. Once a bank experiences a “run on deposits”, few can survive.
What is important to know? The bank specialized in small to large start up companies, many in the tech sector. It also invested excess funds in what others described as aggressive, and in hindsight this will probably be viewed as a particularly risky business plan. Startup companies use debt to other capital raises to fuel their rapid growth, and SVB seemed to be all too willing to help with what some would label as aggressive lending practices. When the run on assets began, the bank was doomed. The FDIC and Federal Reserve stepped in over the weekend and assured the depositors will get 100% of their money back.
Many in the investing public, not understanding the details and thinking of 2008, begin the expected panic selling of assets. Eventually, it may mean the Federal Reserve will stop raising rates and may begin to lower rates. It also raises the debate on the impact of large rate increases by the Federal Reserve as quickly as we have seen and the lag effect of them.
The aftermath will mean that volatility will ramp up, and the rumor mills and panic selling will continue for some period. It also means opportunity as the strong financial banks (which will probably get stronger) and other dividend companies will experience the same volatility.
This is not to mean that this is not worrisome and demands close attention. However, since the last banking crisis in 2008, the rules have changed and many of the top banks are very strong.
We are spending time dissecting all of the quick moving information and making changes accordingly. If you have any questions, please reach out to me.
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