Tapping into Maple

Regulators Stepping Up to Stabilize Banking System

The sudden failure of Silicon Valley Bank on March 10 has sent shockwaves through the financial markets and put investors on edge. The bank was a $200 billion financial institution that specialized in serving the needs of the venture capital and technology community, which is a relatively narrow client base with a high degree of volatile customer in- and outflows even in normal times. After a year of Fed rate hikes totaling 450 basis points, this environment is anything but normal and finally, something has broken. Since the FDIC’s takeover of the bank, the parent company, SVB Financial Group (ticker symbol: “SIVB”) filed for bankruptcy under Chapter 11 after unsuccessfully finding a buyer.

Beyond Silicon Valley, two other smaller banking institutions, Silvergate Capital and Signature Bank, failed in rapid succession. Factors unique to each institution surely contributed to the failures, but the very rapid rise in interest rates over the past year combined with concentrated depositors at these institutions are a major component of this story.

SIVB’s customer base includes many start-ups and companies with less access to new capital sources in turbulent markets. Venture capital funding was extremely tight in 2022 and as a result, these depositors have been withdrawing funds at an accelerating pace for some time. In a stable interest rate environment, or with more conservative financial management, this rapid pace of withdrawals might have been manageable. However, when Silicon Valley announced plans for capital loss-taking in its investment portfolio combined with a capital raise to meet customer withdrawal needs, depositors took immediate action. It was a classic run on the bank.

Both Silvergate and Signature Bank had a meaningful concentration of digital asset-related deposits. The rapid deterioration in the value of digital assets and the resulting deposit declines contributed to the failure of both institutions.

Credit Suisse headlines added to the financial system worries. While Credit Suisse has been under scrutiny by investors for some time, the level of concern increased materially this week, as a top investor indicated that they would not provide an additional capital infusion. On March 15, the Swiss National Bank (Switzerland’s central bank) provided up to $54 billion as a liquidity backstop aimed at restoring confidence which is a solid demonstration of its resolve to avoid a bank failure. The Swiss regulators also issued a statement that “the capital and liquidity requirements imposed on systemically important
banks” had been met by Credit Suisse. Finally, on March 19, UBS Group AG agreed to buy Credit Suisse Group AG in a government-brokered deal for $3.3B aimed at containing a crisis of confidence.

The response from the Fed to prevent contagion from the run on Silicon Valley Bank came on Sunday night, March 12. First, in collaboration with the U.S. Treasury and FDIC, the Fed announced that all depositors of Silicon Valley Bank and Signature Bank would be made whole, irrespective of the size of their account balances. Second, a new facility was created, the Bank Term Funding Program (BTFP), designed to ensure an additional source of liquidity to financial institutions. The facility will provide funding with recourse for up to one year and pledged collateral can include Treasuries, Agencies, and Agency MBS. The Fed is using the Exchange Stabilization Fund (ESF) to provide $25 billion of credit protection to protect itself from potential credit issues related to the pledged collateral. Stressed financial institutions with good collateral already had access to Fed liquidity through a number of other mechanisms, but this extra step demonstrates the resolve of the Fed in cutting off contagion to instill confidence.

At the time of this writing, the nation’s largest banks are working on a coordinated liquidity injection into First Republic Bank, a California-based regional bank. This highlights the fluidity of the situation and also the coordinated efforts to stabilize market confidence. The banking industry is regulated for good reason – safekeeping the savings of Americans is based on trust and prudence – and regulations provide downside protection when needed.

While the Federal Reserve’s actions provide new access to liquidity for the banking sector, losses on bank balance sheets due to the rapid rise in interest rates will remain an issue. The entire sector is affected by the interest rate environment. We believe diversification across funding sources will be even more important to bank health in this environment – diversification by geography, customer type, and business line. Scale is likely to help as depositors may more carefully consider where to place their cash. Diversified business mix at the bank – fee income as well as interest income – in an environment of tightening financial conditions will be even more important as a source of diversification.

We appreciate the confidence and trust you place in Maple Capital Management and please do not hesitate to reach out if you have any questions.

Source: https://www.bloomberg.com/news/features/2023-03-20/credit-suisse-ubs-takeover-how-a-166-year-old-bank-collapsed

Important Disclosures

Maple Capital Management, Inc. (MCM) is an independent SEC Registered Investment Advisor with offices in Montpelier, Vermont and Atlanta, Georgia.
This commentary reflects the views of MCM and should not be considered to be investment or financial advice. MCM does not warranty these views and will not update this communication after the date of publication. Any mention of specific securities is done for illustrative purposes and the securities mentioned may or may not be held in client accounts. No assumption or assurance should be taken that securities mentioned will be safe or profitable investments.
For further information, please contact Steven Killoran at 1-802-229-2838 or at [email protected]. For further information about Maple Capital, including a copy of our informational brochure, please visit our website at www.maplecapital.com.