Prefer to listen in? Play the audio here:
Yesterday the financial and banking sector experienced a major crisis, resulting in the sharpest decline of bank stocks in nearly three years. This was the third worst day for the industry in the last 25 years, following the COVID outbreak and the US government rating downgrade in August 2011. The crisis was triggered by news that SVB Financial Group and its subsidiary Silicon Valley Bank were seeking to raise capital due to losses in their securities portfolio. This was particularly concerning as SVB Financial is a major player in the US startup ecosystem, serving almost half of all venture capital-backed startups in the country. As a result, SVB Financial's shares plummeted by 60%. The impact of the crisis was felt across the industry, with an index of banks, including regional banks, declining by 8%, while the S&P 500 Financial Sector index fell by 4.6% over the course of the day.
If you have questions about what this means and your portfolio exposure, read on, or give us a call. Although we’ve heard reports in the last 24 hours that many funds are overweight in the banking & finance sector, and suffered commensurately, we currently hold very modest and underweighted allocations to the financial sector across all portfolios relative to S&P 500 composition.
What’s going on: SVB Financial Group's struggles are an example of the challenges faced by the broader financial sector as a result of the Federal Reserve's hawkish stance. In particular, the venture capital-backed firms that form SVB's client base have been hit hard by rising funding costs. To cope with worsening cash burns, many of those startups turned to SVB to withdraw their deposits — sparking a cash crunch scenario. As a result, SVB was forced to shore up its capital position, exacerbating the wider market sell-off as investors worry about the potential for contagion. This has led to a difficult situation for the financial sector as a whole, as concerns about rising interest rates and mounting debt levels continue to weigh on sentiment.
More broadly, is this an indicator of something larger?
Looking at various analyst reports, this appears more likely idiosyncratic rather than systemic. Here are a couple notes of interest:
We think the risk of contagion from small to large banks is remote, considering the low share of regional banks in that market. Similarly, the risk of a capital or liquidity event among large banks is also remote. In the bond market, the reaction has been far more contained. While regional banks underperformed the broader index, large US banks were better behaved relative to their equities. It is important to note however, that the situation is dynamic and the potential for further market volatility cannot be ruled out entirely. Aspire will remain vigilant and closely monitor developments in the days and weeks ahead.
Although the banking sector represents a substantial share of the USD IG market at 25% of the notional outstanding, the risk of contagion from smaller to larger banks is low. This is largely due to the limited exposure of regional domestic banks, which account for only 6% of the banks sector and approximately 1.5% of the broader USD IG market. Furthermore, the risk is diversified across 15 issuers, with no single issuer accounting for more than 20% of the notional outstanding. We also believe that the risk of large US banks experiencing a capital or liquidity event driven by asset/liability mismatches or concentrated positions on securities portfolios is remote, given the more stringent regulatory environment that has emerged since the global financial crisis. – Goldman Sachs
While these recent developments in the financial and banking sector have undoubtedly caused concern, we assure you that our team at Aspire Planning Associates is closely monitoring the situation and remains committed to providing timely and accurate guidance. If you have any questions or would like to discuss your investment strategy in light of recent events, please do not hesitate to reach out to us. We are here to help you navigate these challenging times and to ensure that your investment portfolio remains aligned with your long-term goals and objectives.
