Week in Review: March 10, 2023

Markets (S&P 500) suffered their worst week since September, following the collapse of Silicon Valley Bank (SVB) and fears of possible contagion within the broader banking sector. Investors entered the week anticipating Congressional testimony from Federal Reserve Chair Jay Powell, the February employment report, and the implications thereof for the Fed’s next rate hike decision later in March. By the end of the week, investors were focused on determining whether SVB’s collapse, the second largest ever, was an isolated event or an indication of broader stress in the banking sector.

Unlike most banks, SVB was unique in that it catered largely to venture capital-backed start-up companies. As such, its customer base was relatively homogenous. For many startups, equity markets represent an important source of capital. In 2022, market volatility prevented many companies from accessing the equity markets via initial public offerings (IPO).  As a result, many of SVB’s clients relied more heavily on their cash deposits to fund operations.

As those cash demands intensified, SVB was forced to sell about $21B in bonds from its investment portfolio to provide liquidity to clients. Many of the bonds were low-yielding Treasuries purchased in recent years when interest rates were at or near historic lows. Due to the Fed’s aggressive rate hikes over the past year, the value of SVB’s bonds were significantly impacted. Thus, SVB was forced to take a $1.8B write-down on the bonds sold. In response, SVB announced plans Thursday to raise about $2.1B to offset the loss. The announcement created panic, leading to a classic “bank-run” in which SVB’s clients tried to withdraw their deposits at once. Without sufficient liquidity to meet the redemptions, the bank collapsed. On Friday, state regulators shut down SVB and placed it in receivership with the Federal Deposit Insurance Corporation (FDIC).