Lessons to learn from the collapse of SVB and Signature Bank
- Concentration is a double-edged sword:
SVB’s customer base was largely concentrated in the same part of the economy – venture capitalists, startups, founders, etc. This concentration likely led to the bank’s success over the last few years as this part of the economy benefited from things such as very low interest rates, easier access to funding, etc. However, when the tide turned, this concentration is also one of the things that led to the bank’s downfall.
Personal Finance Lesson: Concentrating your wealth in one asset – stock, business, real estate, etc. can sometimes work out beautifully. However, it can also work against you.
- Stress tests are helpful – assuming you are testing the right scenarios:
One of the ideas that has led to more confidence in the banking sector over the last few years is the fact that so many banks had passed their “stress tests”. I’m no expert on these tests, but from what I understand, they are in place to try and see how a bank handles adverse business conditions. Turns out, they did not have a scenario for interest rates rising quickly like we have seen over the last year or so.
Personal Finance Lesson: We have software that is able to “stress test” your investment portfolio and how adverse economic conditions such as bear markets, higher inflation, etc. will impact your ability to reach your goals. Take advantage of the ability to model out these different scenarios and “stress test” your financial plan!
- Understand the risks you are taking
One of the factors that led to SVB’s troubles was that they invested a lot of money in treasury bonds with longer maturities. When interest rates rise, bonds such as these lose value. This is called interest rate risk or duration risk.
Personal Finance Lesson: When investing, you should always try and understand the risk that you are taking on with your money. There is always some element of risk, and that’s ok.
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The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Greg Reabold and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
