Log inCollapse of Silicon Valley Bank (SVB) has no impact for Telford Mann Client Portfolios
Last week saw the collapse of US banking company, SVB, which specialised in dealing with start-up companies.
I am pleased to confirm that we have no exposure to SVB within our client portfolios. Despite this, we are monitoring markets closely to ensure that there is no risk of contagion to other portfolio holdings.
With many of SVB’s customers being early stage technology related businesses, the recent downturn in the sector had a profoundly negative impact on the bank. SVB reportedly backed almost 50% of venture capital firms in the US and these firms have seen their funding dry up in recent months amidst sharp increases in interest rates.
The combination of venture capital clients recently withdrawing large amounts from their deposits at the bank, together with SVB announcing they needed to raise capital of $1.75 billion, resulted in fears regarding the bank’s financial strength spreading rapidly and a rush to withdraw deposits ensued.
SVB were forced to dispose of assets within their own investment portfolio to raise liquidity, however, it appears the bank failed to adequately manage risk with their own portfolio and significant losses were incurred on the sale of their assets as a result.
Over the weekend, authorities in the US stepped in and seized the bank, renaming it the ‘Deposit Insurance National Bank of Santa Clara’. Businesses and individuals with deposits at the bank are expected to receive their capital back. The UK subsidiary of SVB has reportedly been acquired by HSBC for £1 and it is hoped that British start-up companies who were customers of SVB will have access to all of their capital.
A second smaller company, Signature Bank, also collapsed over the weekend, with regulators again stepping in to try and protect depositors. Signature Bank was a key lender in the cryptocurrency industry, which is inherently risky. The issues at the bank appear to be partly driven by contagion fears from the collapse of SVB, with customers of Signature Bank panicking about the security of their funds.
The US central bank has stepped in to implement emergency measures which aim to avoid any short term funding issues at other smaller banks. This is likely to contain issues at regional banks in the US and there is little concern about the financial security of large banks, which have much a more diversified base of customers and stronger balance sheets.
In summary, it is highly unlikely that the collapse of SVB and Signature Bank are the start of a systemic problem for the global banking system and we do not believe that we are facing a 2008 style financial crisis. Ultimately, SVB and Signature Bank failed to manage risk properly amidst a sharp rise in interest rates and this appears to be the driving cause of their demise. Venture capital backed start-ups in the US may face some difficulties in the wake of the collapse, but there is little to indicate that casualties will appear in the broader economy.
Our portfolios have not been negatively impacted by the collapse of SVB and at present, we feel the contagion effect will be relatively limited, with large banks not facing the same issues. We will however continue to analyse the situation and, if necessary, we will make changes to our investment strategies to protect client portfolios.