You have likely been reading about last week’s sudden implosion of Silicon Valley Bank (SVB), the FDIC taking the bank into receivership and, yesterday, US regulators backstopping the value of SVB’s deposits. We wanted to share our insights into what is happening, and, most importantly, what it may mean for you. 

Let me start by saying that investment assets for Ellevest digital clients are held at Goldman Sachs Custody Solutions, while our Private Wealth clients’ investment assets are held at Charles Schwab. None of Ellevest’s client assets are held at a bank like SVB. And you should also know that those assets are held separately from the custodian's own assets and are not co-mingled.

That noted, here is some background on what is happening at SVB: 

Banks earn their money through taking in deposits — which they pay interest on — and then lending out that money (in, say, mortgages or business loans) or investing that money (in bonds) — which they earn interest on. The difference between the interest they earn and the interest they pay is their profit. 

This is typically pretty boring stuff. 

It appears that two things went wrong at SVB. One was that their deposits were overwhelmingly from the venture community. So when venture funding dried up, starting last year, the start-ups that bank with SVB had to withdraw their deposits to operate their businesses. To meet that demand, SVB had to sell their investments; and since interest rates have been increasing, they sold them at losses. It is also believed that SVB’s investments were in longer-term investments (such as long-term mortgage securities), which exacerbated the situation, given that these investments lost more of their value than shorter-term investments. 

In order to meet these obligations and shore up its capital, the bank announced a capital raise. But, rather than soothing client concerns, this announcement spooked them. A number of venture capitalists essentially “yelled fire in a crowded theater,” urging their portfolio companies to withdraw their money ASAP. 

This then caused a “run on the bank” of people trying to get their money out all at once. We know what a “run on the bank” looked like in the analog age: people lined up around the block or knocking on the bank’s locked door. We now also know what one looks like in the digital age: a few clicks and $42 billion (!!) of deposits are wired out in a blink. 

To stem this tide, the FDIC took SVB over, and put in place a plan to backstop the full value of customer’s deposits through a new bank funding program. This means that customers of SVB will have full access to their deposits today. At the same time, regulators also closed Signature Bank, similarly backstopping their deposits.

What does this mean for you?

Worth repeating: None of Ellevest’s client assets are held at a bank like SVB. That means that those assets are held separately from the custodian's own assets and are not co-mingled.

Beyond that, it could mean some pretty volatile markets for a period of time. The immediate question is: Even with the Fed’s actions, are other banks vulnerable, and which ones may be next? While industry analysts note that SVB is unique, given its singular exposure to the venture ecosystem, the market has been pressuring regional banks like First Republic, PacWest, and Western Alliance, viewing them as weaker. The consensus is that the bigger banks are better capitalized than they were during the subprime crisis and are viewed by regulators as “too big to fail;” but the game has been on for the regional banks.

It may mean that the end is in sight for this interest rate tightening cycle. There are common characteristics among economic cycles, but each also has its own texture; this one has been characterized by continued strength in the old economy and weakness / layoffs in tech. (The Wall Street Journal even termed it a “richsession.”) The conventional wisdom is that the Fed tightens until “something breaks” — that something often being a recession. That said, a bank failure (or, now two) certainly qualifies as a break, indicating that the tightening has gone far enough or, indeed, too far. 

If the tightening cycle is almost over, that would be good news for anyone with floating-rate debt (like credit cards) and less good news for savers. 

These types of shocks can be scary, but we would like to point out that we’ve been here before. In the early 2000s, it was the internet bubble bursting (I had a front-row seat, running research at Sanford Bernstein); in 2008, it was the subprime bubble bursting (front row again, running Smith Barney at Citi); and now it’s the start-up bubble bursting (ditto). 

In hindsight, each were excesses being wrung out of the system; each felt violent; each resolved itself; each left a changed landscape. In this case, the victim will likely be the easy venture money for scooter, meal delivery, crypto, and neobank companies; and it may also mean less truly transformational innovation is funded, the impact of which is incalculable.  

No one possesses a crystal ball on what will happen next (including the pundits who will now act like it was so obvious, with the benefit and comfort of hindsight). But in the past, it has paid to stay invested through periods of market volatility, because the stock market recovery tends to happen before it is clear that the worst is behind us. 

We're closely monitoring the impact of SVB and other recent uncertainty in the banking sector on the markets and your investment portfolio. You can expect to hear more from us as this news unfolds.