MK: Hello everyone and welcome to this special episode of From The Desk Of related to the Silicon Valley bankruptcy. We know that you all have a lot of questions, so today I have Allen Gillespie here with me to address some of those questions that you have been asking.
Allen: Thank you, MK. Just wanted to get a quick note out to clients and others as we’ve received a number of calls related to the Silicon Valley bankruptcy. We do at the investment team here think there are things that were very specific to Silicon Valley Bank and Signature Bank that are not indicative of the overall banking industry. But, there are some things that are indicative of the overall banking industry. As everyone’s aware, the feds been raising interest rates very quickly, as cycles go, traditionally bank deposit rates will lag those market rates and because this has been such a big cycle, what that has caused is depositors at the margin are looking for higher yields than they’ve been able to get in their banks. So, deposits have been seeping out of banks and going into the securities markets in order to get higher rates. Now later in the cycle, market rates will frequently be below deposit rates. So, many depositors don’t really play that game, but institutional investors do because you have much larger balances. And this became a specific problem for Silicon Valley Bank about most of its customers were business customers and the venture capital industry. You know, and obviously in venture capital companies, frequently they’re actually burning cash. So, the returns on cash become a real pressure point and if interest rates go up, you know, say you’re sitting on $100 million balance all of a sudden, that’s $5 million a year. That might cover an extra month of burn, you know, on your company. So those deposits can be hot looking for higher returns and they’re above obviously FDIC sort of limits. And then the other issue that I think is somewhat unique to Silicon Valley Bank is most banks when they make commercial loans, commercial loans are floating rate. So, they kind of float up as interest rates go up and if rates go down, they kind of will gradually float back down. But where that impacted Silicon Valley venture capital startup companies frequently don’t borrow money, right? So, they were taking it and putting it into government and fixed income securities. So, they didn’t have as many loans relative to securities on the balance sheet of the bank. So, as they lost those deposits, obviously the bond market was down, they just had a mismatch between depositor demands and the nature of their securities portfolio, so. You know those problems were pretty unique to the bank. I mean, all banks are seeing sort of the deposits are, you know, in high demand, but most banks have a more diversified base, particularly if they have more retail customers, people below the FDIC limit, a more diverse geographic exposure, more diverse industry exposures. They typically don’t see as much hot money, but Silicon Valley had high concentrations in, you know, particular types of companies. Those companies also have higher, different sort of cash demands that are a little bit quicker, and Signature Bank had similar sorts of concentration. So, there are some things we think are general across banking and just competition for rates and given the speed of the rate movement. Uh, but we do think the event like this and we do think the next couple of inflation headlines are going to come in much softer and we’re already seeing market rates at the two-year mark, five-year mark, you know, longer term securities are all below current rates are short term rates, so the markets are already beginning to offer lower interest rates than say in the short term, and even lower rates than cash rates at banks, right? So that’s kind of a normal part of the cycle. So, you know still a little bit of turn, I mean we need to see the Fed kind of pause probably cut a little bit, but most banks I think are kind of in line with the Fed funds rate, which is at about a four and a half. But today, to put that in perspective, most of the treasury curve is now below 4%, right? So obviously that will slow money leaving the banks, right? People will choose to leave money in the banks, not buy treasury securities and things like that. The other issue that the FDIC and the and the feds did today – to enhance that liquidity, because it’s interesting, unlike a say 2008, there really wasn’t a credit problem per say at Silicon Valley, it’s interest rate mismatch issue. So, the government has agreed for up to one year to fund against those securities at their cost. So, in essence to make the bank kind of whole, if you will, in order to protect depositors and because it’s really just a matter of waiting for those maturities, right, as those bonds come back to maturity, they’ll come back to par. So the government’s basically agreeing to finance those in the interim in order to make sure that depositors, you know, aren’t harmed. So, it’s really not a bailout. I mean the capital I think is there, it’s a matter of accruing back up to poor values. It’s really a time gain, a timing mismatch and an interest rate issue. So, it is upsetting to the markets. Uh, we do think it will create underlying demand for, you know, alternatives to cash holdings. We do think it’s also indicative of the turning point in the cycle and in my experience, you get to these extremes and it’s just that it tends to be extremes and kind of an inflection point for the market. And so, you know, Silicon Valley Bank being a good example, you know, loans are a more productive way to put money to work than just buying, you know, government securities, right? If you actually go and invest it in the business. So, it’s actually normal for the cycle. Uh, you know, in my experience, it takes 6 to 9 months for this stuff to kind of wash through, but we don’t think it’s reason to panic. I mean, markets have sort of priced in some of this during the year. It’s sudden, right? But you know interest rate problems happen, but again they’re very different than credit issues. We do think it will lead to a tightening of credit and things like mortgages, because banks will now keep more liquidity than they otherwise would. So, it will probably lead to some tightening of credit standards, which means credit interest rates will stay a little bit higher for a little bit longer, which is a good thing for investors. But the rates thing we think we’re at a turning point in the rate cycle for investors. So, but if anyone has any questions on you know, all the mechanics of FDIC, SIPC, all the different types of programs. It’s something our team here is very well versed in and happy to have those conversations.
MK: Well, thank you so much. That was really excellent, and I hope that that was helpful to anyone out there listening. Thank you so much.
Allen: Thank you. Bye.
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