The run on Silicon Valley Bank, Signature Bank and First Republic was like nothing we’ve ever experienced before. These are not banks that made risky mortgage loans to people with bad credit like we saw in 2007-2008. Their clients were successful businesses and wealthy families. In a way, the banks were victims of their own success.

Regional banks support commercial business for the middle market. Their huge growth recently was due to several factors. The tech sector benefitted from the lockdown of the pandemic as Peleton, Zoom, Apple, Nvidia and several other names you may not even know saw their earnings skyrocket. Silicon Valley Bank was a key provider of banking services for the tech sector. In the case of Signature Bank, they were one of few banks to accept crypto deposits and had been on the radar of bank regulators. However, all of their business dealings were legal. First Republic was caught up in the frenzy due to deposit similarities with the other banks. In effect, the size of their commercial client deposits made them susceptible to possible failure if those deposits were withdrawn quickly.

Silicon Valley Bank saw $42 billion withdrawn in one day alone. That was about one-quarter of the bank’s total deposits. The fear was accelerated and amplified by social media as news of the bank’s challenges to meet withdrawal demands spread like wildfire. It is estimated that 90% of the withdrawal requests didn’t come from bank teller windows, but from online transactions.

The reason why the banks were challenged to meet withdrawal demands wasn’t because of risky lending to questionable businesses practices. It was due to the way banks are supposed to operate when customers open accounts and deposit money. They buy safe and guaranteed government securities. The problem was in the maturity of those securities.

In the case of Silicon Valley Bank, they bought government bonds maturing in about 6-7 years. All bonds drop in price when interest rates rise. And for the last year, the Fed has been raising interest rates aggressively to battle inflation. When depositors began withdrawing large sums of money from Silicon Valley Bank, fear spread on social media that the bank was struggling to meet the withdrawal demand. The withdrawals grew and grew. In the end, Silicon Valley Bank was forced to sell those bonds at a $1.8 billion loss.

The FDIC guarantees deposits up $250,000 per account holder at banks. Over 90% of Silicon Valley Banks’s deposits were above that threshold because they were businesses. As the withdrawals continued, the FDIC stepped in and took control of the bank. On March 12th, the Federal Reserve Board announced it would backstop a potential collapse and all deposits would be guaranteed.

What we need to remember is, analysts and regulators have always struggled to predict financial meltdowns. Before the events from two weeks ago, both banks had high marks from ratings firms. After the 2008 financial crisis, regulators strengthened their oversight of the banking and ratings industry. But historically speaking, with the exception of recent events and the 2008 crisis, banking has been a boring, safe sector for investing. They also typically pay an attractive dividend.

What is very interesting now is that the typically volatile tech sector has been considered a safe haven outperforming other sectors. Last week as the S&P 500 gained 1.43% while the tech heavy Nasdaq gained 4.41%.

All of this happened in light of the 14th anniversary of the S&P 500’s low during the Financial Crisis of 2008. The bottom for the index took place on March 9, 2009.

If you have any questions, please contact me.

The Markets and Economy

• Inflation eased in February as the Consumer Price Index (CPI) rose 6%. That’s down from the previous month’s reading of 6.4%. The Labor Department said it was the smallest increase since September Investors are hoping the Fed will raise interest rates this week 0.25% instead of the 0.5% that was expected a couple of weeks ago. Prices at the producer level fell 0.1% in February.

• Facbook’s parent, Meta Platforms, announced plans to lay off 10,000 employees in a second round of job reductions.

• French President Emmanuel Macron bypassed Parliament and invoked special constitutional powers on Thursday to raise the country’s retirement age from 62 to 64. With life expectancy increasing, Macron said the government could no longer afford to pay benefits for such a long period. Paris has seen significant demonstrations as workers fight the new rules.

• Saudi Arabia’s national oil company reported record annual profit of $161 billion for 2022. The company known as Aramco said its profits grew by 46% last year amid a rise in oil prices.

• Further evidence that the Fed’s interest rate policy is slowing the S. economy and inflation. In February, retail sales fell 0.4% from January. The drop, which was adjusted for seasonal swings, was greater than the 0.3% decline analysts had expected.

• In a recent D. Power survey of 4,000 bank customers, 58% said they have no significant doubt about the level of their financial literacy. However, when asked three financial questions, only 37% answered all three correctly.

• Retail theft is rising as more people return to shop in stores. Macy’s Chief Executive Jeff Gennette told analysts “We definitely had an uptick since last year.” Target said retail theft cost the retailer more than $600 million in 2022.

• In light of renewed concerns about the U.S. economy sliding into a recession, oil dropped to its lowest price since December 2021. Crude prices dipped below $70 on Wednesday, closing the week at $66.74 a barrel.

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The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System.

Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

Consult your financial professional before making any investment decision. You cannot invest directly in an index. Past performance does not guarantee future results.

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Note: All figures exclude reinvested dividends (if any). Sources: Bloomberg, Dorsey Wright & Associates, Inc. and The Wall Street Journal. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

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