SIVB Fallout & Banking Update

Markets have run into another bout of volatility this week and last after the collapse of Silicon Valley Bank (SIVB) and Signature Bank. Markets are concerned that some of the market pressures felt by the two banks will spill over into other regional banks and could create a contagion event impacting not just the banking industry, but the economy as a whole. Heading into this year, we’ve cautioned our clients to expect higher volatility given the current environment, and we expect more market volatility as investors digest this news.

Although bank failures can create panic and make investors uneasy, there are a couple of things to keep in mind about this particular situation:

1. Silicon Valley Bank was in a unique position and did a poor job managing bank-specific risks.

SIVB had a very small percentage of its total deposits under the FDIC insurance cap of $250,000. According to the Wall Street Journal, only 11% of deposits were insured. Because of this, investors were likely more sensitive to news around outflows and concerns about bank solvency, leading to a quicker collapse than one might expect from banks with a higher percentage of FDIC-insured deposits.(1) 

Additionally, the bank did a poor job managing the asset-side of their balance sheet. To spare too much detail, the bank failed to properly hedge its interest rate risk, which lead to outsized losses as the bank needed to liquidate positions to cover withdrawals. This quickly put the bank in a significant predicament that ultimately lead to its collapse.  

2. The Fed is quickly stepping in to backstop the banking sector and loosen lending conditions making it easier for banks to access capital.

Since the collapse of SIVB and Signature, the Federal Reserve Board announced additional funding to banks to help assure depositors and investors that deposits are available.(2) This should take some of the pressure off other regional banks that are feeling pressure considering the two recent failures. This doesn’t mean that we won’t see continued concerns around bank solvency, but this should help alleviate some of those anxieties.

3. What does this mean for my assets at Fidelity?

Fidelity has about $10.3 Trillion in assets under administration and $3.9 Trillion in total discretionary assets, making it one of the largest financial institutions in the world.(3,4) As a client with assets custodied at Fidelity, your cash balances are likely held in the Fidelity Government Money Market Fund, which has no exposure to SVIB. The Fidelity Government Money Market Fund (SPAXX) is all U.S Treasury and government agency securities and is very liquid. The fund owns short-term, high-quality investments with an average maturity of only 7 days as of 3/9/2023.(5) As a result, that fund exhibits much less sensitivity to interest rates, which is something that hurt Silicon Valley Bank and Signature Bank.

Another interesting thing to note is that Fidelity is a private company. In our opinion, this gives them more flexibility to manage through this environment than their publicly traded peers who are getting battered in the public markets. 

4. Bonds are acting as ballasts in the portfolio.

Because of the pressure we’ve seen on banks, markets now expect the Fed to be less aggressive with interest rate hikes given current conditions. This has caused interest rates to drop and bond prices to rise. This has helped bond portfolios increase in value and helped dampen some of the volatility we’ve seen in stock markets over the last week. 

To summarize, markets are still trying to sort out what the collapse of Silicon Valley and Signature mean for the broad economy.  That being said, we invest for the long term in diversified portfolios, have no exposure to SVIB through Fidelity’s Government Money Market Fund and expect the Fed to continue to be supportive of banks to prevent a broad contagion.  Expect to see continued market volatility and be proactive by reviewing your banking relationships relative to the $250,000 FDIC insurance cap and reducing your exposure to uninsured deposits.

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Disclaimer:

Past performance is no guarantee of future results. All investing is subject to risk, including the possible loss of money you invest. Fluctuations in financial markets could cause declines in the values of your account. There is no guarantee that any particular asset allocation will meet your objectives.

Past performance does not guarantee future results, which may vary. The indices are unmanaged and the figures for the Index reflect there investment of dividends, but do not include any deduction for fees, expenses or taxes.

Summit Financial, LLC. is a SEC Registered Investment Adviser (“Summit”), headquartered at 4 Campus Drive, Parsippany, NJ 07054, Tel. 973-285-3600. It is provided for your information and guidance and is not intended as specific advice and does not constitute an offer to sell securities. Summit is an investment adviser and offers asset management and financial planning services. Indices are unmanaged and cannot be invested into directly. Data in this report is obtained from sources which we, and our suppliers, believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Consult your financial professional before making any investment decision. Past performance is no guarantee of future results. Diversification/asset allocation does not ensure a profit or guarantee against a loss.

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