The uncertainty, the panic, the waiting, of this bank failure uncertainty may be starting to feel familiar to clients. That mucky, muddy uncertainty may start producing its own problems: beyond mold, it may breed bad decisions.
Economists have been doing a fantastic job of explaining how the failure of Silicon Valley Bank (and the other two related institutions) is different from those in the past. In their eyes, while the bank failure is indicative of volatility in the financial markets due to fluctuation in interest rates effecting certain assets (like bonds), it is not a sign of overall instability. Which is great. Except most folks don’t peruse economists’ blog posts over their morning coffee. Instead, it will fall to their investment advisor to explain. But what is it that your client is asking when they call about these bank failures? Or, said a different way, what do your clients need to hear about the market?
If you did want to peak at what economists are saying about the bank failure and its impact (or lack thereof) on the market, The Economist’s Editor in Chief Zanny Minton Beddoes summarizes it well: “The scale is different, as is the cause. This time rising interest rates have left the banks exposed. But much of what unfolded over the past week was familiar: the sense of uncertainty, the panicked wait ahead of the authorities’ intervention—and a situation that is worse than initially imagined.” The uncertainty, the panic, the waiting, of this bank failure uncertainty may be starting to feel familiar to clients. That mucky, muddy uncertainty may start producing its own problems: beyond mold, it may breed bad decisions.
Other economists note the possibility for contagion, not just among banks, but in the market. “There may be some contagion to other small, community banks in the U.S.—particularly if depositors aren’t all made whole--but the larger banks are unlikely to follow in SVB’s footsteps. SVB is yet another example that we can expect market disruptions as central banks raise rates and shrink their balance sheets.”
The hashing and rehashing of what happened with SVB may be part of what has clients gnashing their proverbial investment teeth. The number of government agencies stepping in to help resolve the crisis might be causing concern, not delivering relief to investors. Treasury, Federal Reserve, FDIC, potentially others, it seems like all the Kings’ horses and all the kings’ men working to put Humpty Dumpty back together again.
As an example of how quickly this bank failure moved: this article began mere days ago about the bond market, the collapse of which led to the current situation. The sense of being in a snow globe after a sharp shake, with bits of paper swirling around a watery mess brought on by the speed of the failure is shared by investors and market watchers alike. “One week ago, it looked like the open questions for the economy would be answered with data on jobs and inflation. Now we are in a murkier, more uncertain world with greater risks of real economic pain.”
In a nutshell, the problem with SVB was partly its investment in bonds, which lost AMOUNT of value, as well as the clients it served. SVB predominantly served start up and tech companies, who have had recordbreakingly poor performance leading up to 2023. SVB relied on capital from those tech companies. “a key source of cheap deposits — the venture capital boom — has slowed down, just as losses in its investment portfolios have risen.”
That left SVB, via its parent, seeking to raise over $2 billion in capital. The issue with SVB wasn’t necessarily that other banks would fail (see above note about contagion) but the turmoil in the market. “When markets are in turmoil, as they are this week, extreme volatility can reflect more a sense of momentary panic and shifts caused by large investors unwinding positions than any considered reassessment of the likely path of the economy.”
Since the bank failure, large investors have been transparent about their investment in SVB. For example STRS Ohio, “one of the largest public pension funds in the country,” explained that it held shares of SVB worth $27.2 million. Thankfully to the public educators to who STRS manages pension assets, that total makes up only 0.03% of STRS Ohio’s total fund. STRS Ohio also notes that “many other public pension funds held shares of SVB, the nation’s 16th largest bank and a component of both the S&P 500 and Russell 3000 indices.”
And yet, the problem wasn’t just SVB in California and Signature Bank in New York. It drew in another West Coast bank, one with more of a regular clientele. First Republic Bank obtained a loan from almost a dozen other banks. Some called this “the high-finance equivalent of a GoFundMe.” And later, international bank Credit Suisse had to be bailed out, to the tune of $54 billion by the Swiss National Bank. While Credit Suisse had been tottering for a while, the sense of instability intensified. The unknown of what other banks might be stumbling, even with First Republic on safer ground, Credit Suisse shored up and SVB safely under receivership is worrisome.
Investors and clients may have questions about SVB that aren’t actually about other people’s regulations or receiverships. Instead, investors may want to know about their retirement. Investors may feel that once again, as with the pandemic, they are powerless to a bigger force they don’t necessarily know the total impact of. Advisors may do well to consider what has worked with clients in the past when discussing market volatility.
As with volatility, this sense of powerlessness may impact clients differently. Many advisors may want to consider whether questions from clients are driven by risk capacity issues or risk tolerance issues when crafting answers. Low risk tolerant folks may be anxious in these markets because they think a volatile market will tell them something. Low risk capacity folks may be concerned about whether they can weather these markets without serious impact. Making sure to answer the unspoken questions, be they about risk capacity on investment funds or risk tolerance about additional crises, is the key to addressing investor uncertainty in these continuing to evolve times.
 Editor’s note, Economist newsletter, March 16, 2023, via email.
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
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