March 10 2023

Another Classic Bank Run

Another few banks have tripped over themselves investing their clients’ money. Wrong way bets for Silvergate and Silicon Valley Bank have resulted in millions lost, their clients’ trust lost, and deposits exiting massively in short order. If you are a client of such institutions, look for the exit now.

But these cases are not isolated. First, it is a reminder that banks are risk takers. They take deposits from clients, and make the money work at higher spread elsewhere. They do that to different degrees of skills and scale. While doing so, banks need to make sure that their value at risk (VAR) is commensurate to the equity they hold in case their investments don’t pan out as expected. Despite prudential rules, unexpected losses happen on the simplest trades sometimes.

Take SVB, they invested in US treasuries in large amount when rates were at 1.75%. We can’t say that’s the most aggressive trade on the planet. However, at 4.6% now on the 2-year, they are sitting on a massive negative mark-to-market. Fine, as long as deposits stick around, and nobody asks for its money back.

Here comes the second issue. SVB is the bank of the early-stage tech sector and as such has been suffering from the economic pullback inflicted to the sector over the past year. Biotech and Tech alike are strapped for cash, raising money has been harder to come by, and deposits dwindled. In the meantime, banks have been really stingy on their deposit rates in general, and clients took notice. The backlash has been brewing for a while.

While rates were increasing, most banks left deposits at lower rates than the expected short-duration US treasuries. As companies realized, they shifted their deposits to the highest bidders or set-up direct investments into money market instruments or T-bills, as they should. While banks were busy harvesting the spread of this trade, they acted late to quell the gush out of deposits.

And then came the scissor effect. Bank deposits were declining, in the meantime their investment stack was losing value. At some point, it eroded their equity and they got to raise capital…or else damaging confidence and risk a bank run. This is exactly what happened to SVB.

Why is this infuriating? Well, this is another proof that banks are not all the safe haven clients think. Besides, some exploits the asymmetry of information to rip off their clients of precious returns. SVB, and Silvergate are only the latest scandals on a pile of Bear Stearns, and Lehman. Credit Suisse is currently embattled in Europe as well and is belatedly raising deposit rates to woo back clients. Conventional wisdom is hard to change.

Here is what tuned-in investors and CFOs do with their cash: (1) they diversify their banking relationships, (2) they make sure to have a cash management policy in place with set levels of risk and diversification, (3) they maximize the risk return, and cut down intermediaries when they only add risk and fees to the equation. We do that together every single day.


About –

360 Advisory LLC is a Boston-based RIA managing investments, including crypto