After the doom and gloom of 2022 with market instability, a looming recession, and the ongoing cost of living crisis, the surge of markets — like the FTSE 100 — in early 2023 gave many investors reasons to be hopeful about the year ahead.
However, in early March, news from the US gave new cause for concern. The Silicon Valley Bank (SVB) rapidly collapsed prompting a cascade of issues across the greater banking sector and worries for investors.
Read on to discover what happened with the SVB and how it might affect your clients.
Changes in US banking regulations led to SVB taking on additional risks
According to the Guardian, SVB was the primary bank for many major and fledgling tech firms based in the Silicon Valley area. The success of the sector over the past decades had driven large amounts of funds to be deposited with the bank.
The scaling back of provisions of the Dodd-Frank banking legislation (brought in after the 2008 banking crisis) by Donald Trump’s government led to crucial oversight and risk management controls being largely negated.
This led to the senior management at SVB taking on too much risk and left the bank with poor liquidity.
A bank’s liquidity is judged as its ability to meet the demands of payments or withdrawal requests
A bank’s liquidity can be negatively affected by:
- Poor returns on deposit investments
- High costs of borrowing from other banks
- Low interest income from loans.
SVB sought to convert their large cash holdings into beneficial investment returns by moving funds into long-term US Treasury bonds, typically seen as a stable investment.
However, a sharp rise in interest rates throughout 2022 and early 2023 created a situation in which depositors demanded higher returns and the bank was forced to sell some of its bonds at a loss.
Subsequently, the news broke and the bank’s tech investors began to panic and attempt to withdraw their funds and sell-off bank shares. This led to confidence in the bank rapidly declining and its available cash reserves being wiped out overnight.
According to CNBC, in the approximately 24 hours following news becoming public, customers withdrew a staggering $42 billion in deposits, leaving the bank with a negative cash balance of nearly $1 billion before it eventually collapsed the following day.
Danny Moses, an American investor who predicted the 2008 crisis and was featured in the film The Big Short, said of SVB: “This isn’t greed, necessarily, at the bank level. It’s just bad risk management. It was complete and utter bad risk management on the part of SVB”.
Issues in the banking sector can have a domino effect
The banking sector is an intricate web with major global banks regularly lending funds amongst themselves to help with liquidity issues or funding requirements. So, a single bank’s poor liquidity and possible collapse can lead to widespread issues across the sector as a domino effect triggers issues from bank to bank.
The issues at SVB have spread to the European banking sector and caused problems at Credit Suisse and Deutsche Bank who have both reported large losses. The former had to be sold to its rival UBS, who have been reassured by commitments from the Swiss government to backstop the investment.
According to the Evening Standard the banking crisis has seen the FTSE 100 tumble 8% in the 21 days leading up to 22 March 2023 and has similarly caused markets in France and Germany to dip.
As banks hold the funds of other major businesses, issues in the banking sector have the potential to spread into other markets and affect the greater economy.
This might naturally cause your clients concerns about the state of their investments and the security of their savings. But the SVB story can teach your clients valuable lessons in risk management and how to take steps to protect their wealth.
Simple lessons SVB can teach your clients about how to better protect their wealth
The SVB story ultimately boils down to poor risk management. It is vital that your clients routinely take the time to consider the potential risks to their investments and savings, and their ability to tolerate potential losses, before making any major decisions.
Investments
If your clients are worried about the banking crisis and its potential to affect their investments, they might find reassurance in reviewing their portfolio’s diversification.
A well-diversified portfolio spreads your clients’ investments across different markets and assets so that if the worst occurs and there are potential losses, the greater portfolio is designed to mitigate against it and help your clients stay on course to reaching their long-term growth goals.
Your clients should also keep in mind that while short-term market dips can be concerning, markets typically rebound in the long term, so a patient and calm approach is likely to see them better positioned to make their desired returns as well as boost their overall emotional wellbeing.
Savings
Your clients are likely to want safety nets in place to provide for them and their loved ones in the case of emergency and protect their funds from short-term instability, such as:
- Keeping an emergency savings fund of between three and six months’ worth of essential bills like mortgage/rent, utilities, and groceries to cover outgoings
- Considering moving surplus funds into tax-efficient pension savings
- Spreading savings between different vehicles like savings accounts, ISAs, and Premium Bonds (although savings will be protected by the financial services compensation scheme (FSCS) up to the amount of £85,000 in the event of a bank’s collapse and inability to pay).
Before making any important decisions regarding their financial plans, your clients should at first consider contacting Delaunay Wealth and discussing next best steps.
Get in touch
If your clients have any lingering worries about current market instability and what it might mean for their savings and investments, they should seek advice by emailing us at mail@delaunaywealth.com or calling 0345 505 3500.
Please note
This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Your pension income could also be affected by the interest rates at the time you take your benefits. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
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