Silicon Valley Bank

Lots of news about Silicon Valley Bank. So we thought an overview would be helpful.

First and foremost, Raymond James is incredibly strong. Why? Because our foundation is fortified by a straightforward, high-caliber capital structure – supported by $9 billion of shareholders’ equity.

As of December 31, 2022. Past performance is not an indication of future results. The information provided is for informational purposes only and is not a solicitation to buy or sell Raymond James Financial stock.

Silicon Valley Bank (SVB) was the 16^th largest bank in the US by deposits (source: US Treasury Dept). But their business model was very different than most other banks. And SVB’s management also made a fatal error in how they invested the customer deposits. SVB specialized in working with aggressive venture capital startup companies mostly in the technology sector. So if you wanted to try to start the next PayPal or Facebook, you probably had money tied up with SVB. And those small incubator startup companies have real problems right now because of SVB’s mismanagement of their bank. For example, those little companies can’t make payroll.

SVB did some routine things in its day to day business

1. They took in deposits from customers (mostly those aggressive startup tech companies)
2. Then lent out some of those deposits to other customers (as almost all banks do)
3. And invested some of those deposits to earn interest (as almost all banks do)

But this is where SVB made its fatal error……..

SVB invested lots of the deposits into 10 YEAR US GOVERNMENT BONDS. They locked the deposits up for a long 10 years, not respecting the fact that any of those deposit customers could walk into the bank on any day and demand their deposits back instantly. And when the bulk of the deposit customers did exactly that all at once, SVB had to fire sale their 10 Year Government Bonds at large losses. Poof. No more SVB.

Could there be collateral damage from SVB’s mismanagement of their own bank? Of course. There almost certainly will be.

Is it likely that the collateral damage is significant and widespread throughout the banking system? No.

Why? Because SVB operated in a niche space, and its mistakes were specific to SVB’s own internal company decisions. In addition, in this post-2008 world, US banks are significantly better capitalized than prior to 2008 when the Great Financial Crisis (GFC) arrived. For the last 14 years, they have been forced to carry massive amounts of reserves in an effort to avoid the liquidity issues of the GFC.

Bigger picture, the Fed has been raising the one-day interest rate for over a year now, in an attempt to weaken the economy further which they hope will slow inflation. Finance people like us have been saying “the fed won’t stop until it breaks something”. Well, here we are. It broke something.

The upside of this is that the Fed is almost certainly starting to have internal discussions about stopping the rate hikes, and maybe even eventually starting interest rate cuts. Considering that the biggest headwind for the capital markets for the last 18 months has been interest rate hikes, any shift by the Fed could easily end up being the rocket fuel which starts liftoff for the next up cycle. We would not expect the markets to make it easy. The markets always move jaggedly and unevenly as they try to shake out the weak hands. But this likely change in approach by the Fed would almost certainly enable the markets to start swimming with the tide and no longer against it.

The views expressed herein are those of the author and do not necessarily reflect the views of Raymond James & Associates or its affiliates. All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Investing involves risk and investors make incur a profit or loss.

The investments listed may not be suitable for all investors. Raymond James & Associates recommends that investors independently evaluate particular investments, and encourages investors to seek the advice of a financial advisor. The appropriateness of a particular investment will depend upon an investor's individual circumstances and objectives.