Silicon Valley Bank – Overview

On Friday last week, Silicon Valley Bank (SVB) was closed by US regulators after a run on the bank’s deposits occurred. In terms of assets, SVB’s collapse was the second biggest bank failure in US history. By the end of 2022, the bank had around $209bn in assets, according to the Federal Reserve. However, when customers tried to withdraw $42bn in deposits on Thursday morning, the California Department of Financial Protection and Innovation closed the bank swiftly and placed it under the control of the Federal Deposit Insurance Corporation (FDIC). In addition, a few days later, a related company, Signature Bank was also closed and placed under the control of the FDIC.

Over the weekend, details surrounding SVB bank’s collapse started to emerge, and broader questions started to arise on the health of the US banking sector. This especially after a prolonged period of ultralow interest rates had been followed by persistently high levels of inflation, necessitating interest rate hikes that were bound to leave some casualties in their wake.

In this note, we assess how this situation unfolded, its current and potential effect on markets and the extent to which client portfolios are exposed to SVB, Signature and general market contagion.

Shades of the GFC

The past few days may have brought up some emotions that investors haven’t felt since the Global Financial Crisis. Indeed, when US banks collapse, financial markets tend to get caught in the crossfire. On Monday, we saw some of that play out with other banks in the US picking up the tab for SVB’s mismanagement. One of the factors that made 2008 that much more daunting to endure was the opacity of the situation.

While the effect that banks like Bear Stearns and Lehman Brothers closing their doors had on financial markets was evident, it wasn’t entirely clear what was causing the turmoil. Only in the aftermath did it become clear how complex credit events drove the world’s financial system to the brink.

Fortunately, in the case of SVB the same level of opacity is not present. Not only was the regulatory closure of the bank one of the quickest in history, but it hasn’t taken long for market participants to figure out what went wrong.

What Happened

Modern commercial banking is built on the concept of fractional-reserve banking. Under a fractional-reserve banking system, banks that take deposits from the public are only required to hold a fraction of those deposits in liquid form to fund withdrawals.

Ultimately, this system is built on the assumption that not everyone will withdraw their money from the bank at the same time, therefore the bank can use those ‘excess’ deposits to generate returns. This assumption holds, most of the time.

But, if for some reason the bank’s depositors all try and withdraw their capital at the same time, the bank technically doesn’t have the ability to honour these commitments and as a result a ‘run on the bank’ occurs. In contrast to the GFC which was driven by a credit crisis, SVB’s collapse was primarily a liquidity-driven bank run which makes it a lot easier to understand.

Why did SVB’s depositors lose faith in the bank?

Two factors ultimately led to SVB’s depositors losing faith in the bank – (1) the Bank’s asset profile and (2) the nature of its deposits. We will look at each of them below. But first, we need to understand a bit more about SVB’s business.

Silicon Valley Bank (SVB) was founded in 1983 by a group of bankers looking to provide financing for companies that were part of Silicon Valley’s nascent technology industry. Fast forward thirty years and it would be difficult to find a company in Silicon Valley that hasn’t heard of or done business with SVB.

Indeed, the success of Silicon Valley became SVB’s success. And the company didn’t veer far from those roots. One of the factors that made SVB stand out from other commercial banks was the homogeneity of its loan book. At the end of December 2022, 56% of the money it had loaned out was to venture capital and private equity firms, 14% to high-net-worth individuals and the remainder was to technology and healthcare companies. This is an important point to keep in mind because it contributed to SVB’s downfall.

1. SVB’s asset profile

In short, during 2020 and 2021, SVB received a significant amount of new deposits. This was mostly driven by the state of the US tech sector and loose monetary policy which drove a boom in stock prices and higher levels of profitability.

SVB then offered loans to depositors, banking the difference between the interest payments to depositors, and the interest receipts from loans. The balance of capital not loaned out was then invested according to regulations in safe and liquid assets.

SVB chose to invest the excess capital in longer-dated US treasury securities on the basis that as these were held to maturity, and as they were backed by the US government, were a prudent store of value to underpin the banks activities. With inflation rising rapidly since 2022, treasuries have lost value as interest rate increases have resulted in marked-down bond prices. Now, normally this would not be an issue as the bank would typically have shorter-term cash available to fund any withdrawals, avoiding the locking in of capital losses by having to sell marked-down US treasuries. This would also have had the implication of reflecting as a loss in the income statement which they were naturally keen to avoid.

Given the high overlap of technology-centric customers, and the fact that this sector has also been facing increased headwinds as inflation and interest rates have risen, withdrawal requests had started to escalate. And because SVB has locked up much of its excess capital in longer-dated assets currently reflecting losses, they didn’t have the flexibility to compete with other banks offering depositors higher interest rates. This drove further outflows from the bank.

SVB issued a notice on the 7th of March informing shareholders of their intention to raise equity capital to fund deposit withdrawals. But depositors weren’t having it, and on Thursday morning they collectively tried to withdraw $42bn from the bank, which led regulators to step in on Friday the 9th of March.

2. The bank’s deposit profile

In the US, if you open a cheque or savings account at an FDIC-insured bank, your deposits up to $250 000 are essentially insured by the US government.

However, the FDIC only insures deposits up to $250 000, and given the fact that SVB’s client base comprised of depositors that mostly held more than $250 000 with the bank, their deposits were not FDIC insured.

Ultimately, this meant that the only way these depositors would be able to get their money back, would be if the US government explicitly stepped in to insure their deposits – which is exactly what has happened.

The Elixir

As we saw during the GFC, the biggest risk associated with high-profile bank failures is that they can cause widespread contagion and panic that can lead to market turmoil, such is the interconnected nature of the banking system. A run on the bank can be self-fulfilling: the mere perception that the bank has risk creates outflows which ultimately creates the problem which may not have been real to start with.

In contrast to the GFC, the response from the US government and the tools they have used to thwart contagion risk in this example have been markedly different.

Over the weekend the Federal Reserve and US Treasury ensured SVB and Signature’s depositors that their capital would be fully accessible by Monday morning. Secondly, the Federal Reserve has put in place a funding backstop that makes $25bn available to eligible banks and other depository firms should they incur similar circumstances to SVB.

Ultimately, regulators have done a lot to ensure that SVB’s troubles stay contained. But, as we all know that is difficult to do and markets are still spooked.

The Current and Potential Market Effects

On Monday the 13th of March, the US market, and specifically the regional banking sector, was the most influenced by the collapse of SVB and Signature. On an index level, regional banks were down about 12% on the day, despite assurances from the US government that depositors would be protected.

Currently, it is difficult to assess how much further markets are likely to fall and it seems like most investors are trying to establish a baseline level of confidence in the banking sector.

With that being said, on a longer-term basis there are some important points worth highlighting. Firstly, sustained levels of higher interest rates acted as the catalyst for SVB and Signature’s collapse. And to an extent, these casualties are side effects of excess stimulus being drained from the financial system after a decade of propping up companies that weren’t as resilient as they seemed.

Ultimately, the regulatory environment they operate in, and their own internal controls, let them down. Investors are likely to incur a capital loss in the banks affected, while depositors will likely be covered through the actions of the US Government.


An increasingly wide range of assets across the US, Europe and Asia, and to some extent in SA, have felt the impact of this event so far. While most fund managers we have surveyed indicate they believe the risk is quite idiosyncratic and therefore contained to SVB and a few other small regional banks in the US, there is potential that second round effects expose other institutions which have similar vulnerabilities.

One of these is Charles Schwab, while not a traditional bank the company does take vast deposits from customers. Schwab is quite widely held and is a Top 100 share in global markets. The share price has fallen 35% over the past week as investors have become concerned that similar risks apply.

In addition, another bank that seems to be getting caught in the crossfire is Credit Suisse. On Monday, as the news around SVB was unfolding Credit Suisse announced that there were material weaknesses in their financial reporting controls. Although this has little to do with SVB, over the past five days the share price is down around 17%.

Funds where we have engaged the managers around their broader banking positions and exposure are summarized below:

  • Baillie Gifford – None of the global equity funds have exposure to SVB or Signature Bank. Generally, banking exposure in Baillie Gifford’s portfolios has been quite limited. However, the Baillie Gifford Managed Fund has a small holding in First Republic Bank (0.1%) that has also been caught in the crossfire of the general market sell-off.
  • Dodge and Cox – No direct exposure to SVB and Signature. Although, one of the fund’s largest holdings is Charles Schwab (2.5%).
  • Artisan Global Value Fund – This fund does not have any exposure to SVB or Signature although two of its largest positions are large banks – UBS (4.9% of the fund) and The Bank of New York Mellon (4.5%).
  • Schroder Global Recovery Fund – Does not hold any direct exposure to SVB or Signature. Although, two of the fund’s largest holdings are British and European banks – Standard Chartered and UniCredit.
  • Orbis – Orbis does not own any shares in SVB or Signature although across its strategies it does have sizeable exposure to European, Japanese and Korean banks. Orbis has built these positions up over time as valuation opportunities have presented themselves, largely believing US banks are overpriced.
  • Ninety One Global Franchise Fund – Prior to the decline, the fund had 2.3% invested in Charles Schwab. Currently, they still believe that Schwab’s business is strong enough to withstand the current market environment. In addition, they feel that the market drawing parallels between SVB and Schwab is not necessarily accurate given that SVB is a very different business to Schwab.
  • Walter Scott – The BNY Mellon Long Term Global Equity Fund has no exposure to SVB or Signature and general banking exposure has been quite limited.
  • iShares – Before the collapse, SVB made up a very small part of passive portfolios. It accounted for around 0.05% of the S&P 500 and around 0.03% of the MSCI ACWI. Signature accounted for around 0.01% of the MSCI ACWI prior to collapse.
  • Redwheel Global Horizon – The fund has no direct exposure to SVB or Signature, although it does hold diversified exposure across large US, Spanish and Eastern European banks.
  • Fidelity – The Fidelity World, Multi-Asset Income and Emerging Markets funds don’t hold direct exposure to SVB or Signature. The Fidelity World Fund does hold exposure to some global financial companies.
  • Coronation – The Global Managed, Global Capital Plus, Global Optimum Growth and Equity Select funds didn’t hold any direct exposure to SVB and Signature. However, all these funds have exposure to Charles Schwab with the largest allocations within Equity Select and Optimum Growth (both close to 3%).

Trends in Banking Exposure

Over the last few years, a common theme among global value funds has been European listed bank exposure. Some popular holdings in this category include Standard Chartered, UniCredit and Banco Santander. For the most part, these companies have presented a valuation opportunity for most managers that are able to gain comfort in the strength of their balance sheets.

During COVID, value fund exposure to European Banks was generally quite high – after the market selloff these companies took longer to recover, especially in an environment where interest rates were low and bank earnings were negatively affected as a result. However, this has changed somewhat as interest rates have increased. In a market environment where interest rates are higher and earnings growth is linked to those interest rates, banking exposure can be justified among managers that are also looking for earnings growth or a stream of higher quality earnings.

Broader Portfolio Implications

The market volatility caused by the closure of SVB and Signature has had broader implications for global fund performance. From a diversification perspective, portfolio investments that have generally gained include:

  • Negative USD Exposure – General underperformance from the USD has meant that non-USD positions have outperformed. This is after a prolonged period of USD strength.
  • Bond Exposure – Largely because of the flight to safety, shorter-term bond yields have rallied strongly.

Lastly, as we previously mentioned, general market consensus has shifted, and many investors now believe that the Fed will have to start lowering interest rates. Although this may still be unlikely, lower rates could benefit a number of industries including technology.

Where to From Here?

Apart from a handful of smaller banks, the damage caused by SVB and Signature looks like it will be relatively limited. A lot of this is driven by the level of support that the US government has shown and their clear intent to thwart contagion risk from spreading.

Importantly, there is no direct exposure to SVB or Signature that we are aware of outside of the passive funds which we invest in and are forced buyers of the full market. And even within that ambit, SVB and Signature have historically made up a small part of global equity indices.

But perhaps more importantly, over the past few years material asset price fluctuations have become a byproduct of a world where monetary policy has moved from being highly unconventional to more normal. In addition, that normalization process is likely to only be fully completed once global inflation is contained. As a result, we are likely to see asset prices move around more as inflation finds a place to settle, and the wheat is separated from the chaff.

Ultimately, during anxious times like these, there are significant benefits associated with using a strong group of investment managers and holding a diverse portfolio of assets that mitigate against idiosyncratic risks and provide some much-needed comfort. In addition, given the nature of funds that we cover, several funds are likely finding some decent opportunities in the current volatile market environment.