Silicon Valley Bank Collapses

Stocks are down .5% – 1% and bonds are up .5% – 3% this morning after the first FDIC-insured bank failure since the Great Financial Crisis (see below).

February’s Employment Situation report yet again confirmed strength in the job market. A much higher than expected 311,000 new jobs were created during the month. Wage growth for US workers also picked up to an annual rate of 4.6% vs. 4.4% in the prior month. It’s hard to escape the obvious fact that we’re short workers in this country. There are a total of 155-160 million occupied jobs, which is higher than pre-Covid levels. And yet, as I mentioned the other day, we have far more open positions than we have people willing to fill them.

But there were signs that the labor shortage might be abating. The labor force participation rate actually ticked up to 62.5%, the highest since March 2020. With more people re-entering the work force and looking for jobs, the unemployment rate rose to 3.6%. This is great news. Federal Reserve officials view the extremely low unemployment rate and elevated wage growth as signs of a real imbalance that could keep inflation on the high side for quite a while. But rising labor supply can go a long way toward relieving that imbalance.

Silicon Valley Bank failed today and will now enter FDIC receivership. Its publicly-traded holding company, SVB Financial Group (SIVB), saw its stock fall 60% in the last two days, and trading is now halted. Investors, worried about the risk of contagion throughout the banking system, are selling off bank stocks across the board.

Are we facing a systemic financial failure? Wall Street analysts say most likely not, but there could be knock-on effects and the situation needs to be monitored closely. It’s worth noting that this is not your average bank; it’s a commercial lender primarily exposed to venture capital companies who invest in niche high-tech start-ups. We know that IPO markets and venture capital have been drying up in the face of Fed rate hikes and volatile stock/bond markets. My point is that SVB is not at all representative of the US banking sector.

In addition, the failure seems to have been ushered in through mismanagement of the bank’s Treasury bond portfolio. According to the Wall Street Journal, “SVB’s problems center on a wave of cash that came into the bank during the Covid boom. The firm then used those funds to buy long-term Treasury bonds whose value was hit when interest rates increased.” Those losses made it difficult for SVB to meet its obligations, and an old-fashioned run on the bank ensued.