Our investment and fiduciary professionals share insights into the recent bank failures and the impact on the markets.

March 15, 2023

The abrupt collapse of Silicon Valley Bank (SVB) in recent days has garnered a great deal of attention in financial markets and the media. News reports emerged late Wednesday, March 8, that the bank — the 16th largest in the US by assets — sought to raise a significant amount of equity capital to offset losses on its securities portfolio.

This announcement quickly snowballed into a classic bank run by SVB depositors concerned about the bank's solvency. Regulators stepped in and closed the institution two days later, which left remaining depositors unable to access funds and sparked concerns among investors that other banks may face similar risks. Over a two-day period last Thursday and Friday, the SPDR S&P Regional Banking ETF (KRE) plunged 12.1%, while the broader S&P 500 index lost 3.3%.

In response to the emergent crisis, late Sunday a consortium consisting of the Federal Reserve, the US Treasury Department and the Federal Deposit Insurance Company (FDIC) announced a set of measures intended to satisfy SVB depositors and shore up confidence in the broader banking sector. In particular, the group announced that the FDIC would guarantee all SVB deposits (including those exceeding the $250,000 federal deposit insurance coverage threshold) and that a new emergency funding facility had been established for banks seeking additional funds to meet potential withdrawal requests. Concurrently, authorities announced the forced closure of a second bank, Signature Bank, which had a measurable presence in the cryptocurrency market and had suffered an elevated level of sudden depositor withdrawals. (It was announced that Signature depositors would also be protected.)

While we and many other financial market participants continue to evaluate these rapidly developing events and their ramifications for the broader banking sector and the U.S. economy, we offer below some initial commentary, based on information known thus far, on certain key questions many are asking:

Was SVB an isolated event?

There are reasons to believe that SVB's failure was indeed an isolated event, based on the fact that the bank had a uniquely aggressive risk profile. For instance, its depositor base was heavily skewed towards start-up technology companies that maintained large (uninsured) balances with the bank, versus traditional retail deposits, and was therefore less "sticky" than that of many other banks, leaving SVB more susceptible to a bank run. In addition, its asset portfolio included sizable investments in long-term Treasury bonds and mortgage-backed securities whose value had declined considerably as interest rates rose over the last 12 months.

At the same time, given myriad pressures presently facing the U.S. economy — e.g., rapidly increasing interest rates, slowing economic growth, the Federal Reserve's quantitative tightening measures — it is possible that other banks, particularly those with riskier profiles (in regard to assets, capital, liquidity, or industry concentrations) could face increasing pressures going forward. In addition, smaller banks could face challenges retaining deposits if consumers increasingly perceive larger banks to be more stable.

Will measures by the Federal Reserve, Treasury and FDIC head off a broader crisis?

The announced measures clearly provided great relief to SVB depositors while seemingly allaying fears about the safety of deposits across the banking industry. Notably, there have been no reports of ensuing bank runs at other institutions thus far. Observers will be closely watching for signs of contagion at other banks in upcoming weeks to determine whether the consortium's actions have sufficiently forestalled further problems. For their part, however, investors greeted the deal with continued trepidation, as the SPDR S&P Regional Banking ETF plummeted another 12.3% on Monday, March 13, before settling slightly higher the following day.

Gallagher will continue collecting information from investment managers regarding the banking sector turmoil and associated market volatility and will pass along our thoughts on any further notable developments as warranted. In the meantime, please don't hesitate to reach out to your Gallagher consultant if you have questions.


This material was created to provide information on the subjects covered, but should not be regarded as a complete analysis of these subjects. The information provided cannot take into account all the various factors that may affect your particular situation. The services of an appropriate professional should be sought regarding before acting upon any information or recommendation contained herein to discuss the suitability of the information/recommendation for your specific situation.

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