Will the Silicon Valley Bank Collapse Lead to a Broader Contagion?
Published by
James Russo
on
Two clients have emailed me this weekend questioning whether the Silicon Valley Bank bankruptcy will lead to more bank failures.
As capitalism is built on confidence, it is certainly possible that any contagion could spread leading to other bank failures. However, as Silicon Valley Bank operated under specialized conditions lending to startup tech companies, I believe it is unlikely a broader bank failure such as that experienced during the financial crisis will occur. Larger banks such as those you and I own (i.e. JP Morgan, Bank of America, Citigroup, Royal Bank of Canada, PNC, etc.) lend under much stricter circumstances and are far better capitalized today than they were in 2008.
As my favorite movie (not just favorite Christmas movie) displays, no bank can withstand a run on it without government backing. I believe the link below from the scene provides a good synopsis of how bank runs occur and how banks operate.
Some important investment lessons I’ve included in my book which are confirmed with this bank failure and how we’ve always managed money:
- Never utilize leverage or borrow money against your portfolio as it can lead to financial ruin.
- Manage risk by not making large bets on any one company. Most Wall Street analysts were bullish on Silicon Valley Bank and none predicted a complete failure.
- Don’t purchase long duration bonds as duration and interest rate risk is significantly increased. Over the past twenty years, our fixed income portfolio has ranged in duration from two to four years.
Wealth management lesson:
- If you have more than $250,000 (more than the insured FDIC limit) at one bank, consider having us manage a portfolio of treasury bills for your short-term cash.
As always, please don’t hesitate to contact us with any questions.