March 16, 2023
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By now you have probably heard the headlines about Silicon Valley Bank among others being suspended. This past weekend provided a lot of drama in the banking world; bringing back fears of bank runs. In response; the FDIC, Federal Reserve and Treasury have agreed to work together and provide full insurance for 100% of all depositors of Silicon Valley Bank..not just insurance up to $250K.
What about the cash we hold, how is it managed? Our primary custodian; Folio/Goldman Sachs FDIC ‘sweeps’ cash by account into 12 banks to maximize the FDIC insurance well beyond a single bank insurance limits. This means each account has insurance up to $3 million, well beyond the $250K limit. Perhaps the takeaway from this weekend should be that capital allocation matters and nuance behind even cash management should be taken very seriously!
Our clients at Folio/Goldman have always had cash insured beyond the 250K limits. If a client has above $3M in cash (the sweep program limit) we would generally recommend capital allocation among more bank insurance, money markets and other structures to capture more safety. This is a strategy many of the companies involved with Silicon Valley should have been implementing for a cash management program.
Short Version of What Happened This Weekend
Ultimately, when interest rates move up faster than banks can adjust things have a way of breaking down. Long duration treasury value has declined from higher rates and this can create duration mismatch for some banks. The group of banks overweight long duration seems limited and Silicon Valley was by far the worst. Even with an overweight long duration, generally this is not a major problem until many depositors want money back in a short period. If that money has declined 20-30% it’s hard to make them whole on the deposits. Silicon Valleys concentrated client base within tech startups created a recipe for disaster. When the tide went out on tech startups last year the pressure for deposit withdrawals increased. Having a non-diversified client base all subject to similar risks was a bad decision. I also have a sneaky suspicion some additional bad banking decisions will come out that had been taking place behind the scenes for Silicon Valley Bank.
Please note that Silicon Valley was a very unique situation and an outlier compared to almost every other bank. Most banks do not have this mismanaged duration risk to the level of Silicon Valley.
None the less, interest rate pressure is certainly being felt on a select group of banking models around the country. We think this is a very select group from our data analysis, but unfortunately the fear could always cause some contagion beyond the idiosyncratic risk of a select group. Please note we have 0 direct exposure at moment to regional banks. If investing directly into a bank equity we have chosen larger banks like JP Morgan or Bank of America thus far to avoid some added sensitivities smaller banks might feel in this environment. Of course, if bank runs continue beyond a select group it would naturally have major consequence on all investing (big banks and beyond); but also may provide some interesting opportunities longer term.
We are still analyzing and plan on giving more context if needed. So please stay tuned! Be aware; our initial hunch based on first review of data seems to indicate this is fairly isolated and specific to a few bad actors. If anything beyond this manifest we will of course be in close contact. For now; its markets being markets…never a dull moment.