Making Sense of SVB, a Unique Bank with a Classic Problem

Silicon Valley Bank’s (SVB) collapse sent shockwaves across public and private markets over the weekend, and created a volatile start to the week. How are our investment teams making sense of SVB’s collapse? Monday morning, I sat down with four of our senior investment professionals: Dr. Sonal Desai, Chief Investment Officer, Franklin Templeton Fixed Income, Ryan Brist, Head of Global Investment Grade Credit, Western Asset, James Cross, Co-Head of Venture Capital Investing, Franklin Equity Group, and Dan Nuckles, Research Analyst – Banks and Financials, Franklin Equity Group. We discussed why Silicon Valley Bank is unique, what may have caused the problem and where we see opportunities. For the complete webinar, please click on this link.

Silicon Valley Bank is a unique bank with a classic problem. SVB was focused on startup companies primarily in technology. Startup and venture capital firms held large deposits at SVB that were not guaranteed by the Federal Deposit Insurance Corporation (FDIC). SVB served half of all venture-backed companies in the United States.1 SVB failed because of a mismatch between its short-term depositors who were withdrawing assets and its longer-term assets, mostly US Treasures, that had dropped in value as interest rates increased. This bank failed because it did not have a diversified client base and lacked strong risk management, which ultimately ended in a bank run.

Regulators and Washington calmed concerned investors. The stock market movement, especially regional banks, on March 13, 2023, tells us that there are still concerns with people moving their deposits away from smaller banks to larger banks, which could cause additional instability. However, the recent Fed action seems to have calmed some of the initial fears heading into the weekend.

The Federal Reserve (Fed) may have created a bubble. This is a problem of the Fed’s own making by keeping rates very low over an extremely long period of time, leading to a general “asset bubble.”