We are writing to give you a brief update on the events in the banking sector over the past week and the implications on Rain portfolios. By now you are likely aware of the events surrounding Silicon Valley Bank (SVB) which was seized by the FDIC on Friday, and Silvergate Capital Corp, which announced it was voluntarily liquidating its banking entity. Both firms were hit by downturns in their respective industries, technology, and cryptocurrency startups.
While we believe this event will create more volatility for specialized regional banks, we do not see a high probability of a material spillover to other financial firms, markets or the economy most broadly. While sharply higher interest rates were a contributing factor to their demise, it was the unique nature of their deposit base and liquidity management that ultimately led to their insolvency. (When looking at Tier 1 capital ratios and adjusting for unrealized losses on their securities portfolios, there is simply no other example in the US banking industry that comes remotely close to the mismatch of assets and deposit liabilities that plagued SVB; this appears to be an isolated case of extraordinarily poor liquidity management on their part). The FDIC has said it will make all depositors whole from its Deposit Insurance Fund (DIF), a more than $100 billion pool of insurance paid for by fees assessed on FDIC-insured financial institutions. The Federal Reserve has also announced a new bank funding program that is intended to further safeguard institutions that may be vulnerable to this market instability. The unique nature of these banks’ problems and the steps taken by the government and regulators are likely to limit any contagion in the banking sector or more broadly.
There is always the possibility, however unlikely, that indirect impacts or spillover to the broader economy could contribute to market instability going forward. In fact, we wouldn’t be surprised if equity markets use this as an opportunity to finally price in lower earnings expectations that seem inevitable given the deceleration of economic activity in recent months. That would be a healthy outcome of this turmoil and one that would bring markets closer to their fair value. After all, some of the best investment scenarios emerge during these challenges. In the meantime, we will continue to manage risk through robust diversification and a healthy dose of caution as these events unfold. We will continue to keep you informed as events develop; should you have any questions in the meantime, please don’t hesitate to reach out!