Our Base-Case Assessment on Recent Bank Failures

Summary:

Our Base-Case Assessment on Recent Bank Failures

Stock and bond market activity has been materially shaken as Silicon Valley Bank (SVB), the California bank subsidiary of SVB Financial Group, and Signature Bank of New York (SBNY) fell into FDIC receivership.

In this latest edition of LPL Street View, Chief Investment Officer and Director of Research Marc Zabicki gives you LPL Research’s take on these developments and provides some suggestions as to what to do about it.

Silicon Valley Bank is the first FDIC-insured institution to fail since 2020 and the largest by assets since Washington Mutual failed in 2008. It was the 14^th largest banking institution, by assets, in the U.S.  Signature Bank (SBNY), an FDIC-insured New York state commercial bank, was the 21^st largest banking institution. SBNY fell victim to excess crypto-related deposits and was also experiencing material deposit outflows (-16.5% year-over-year).

The news of both of these bank failures has caused market participants to speculate if another shoe to drop. 

At this time, we do not believe the Silicon Valley Bank and Signature Bank of New York failures are a deeper sign of things to come. However, we are paying close attention to ongoing developments in the banking sector and in other industries for hints of any widespread contagion. We believe more banks may come under distress (72 FDIC-insured banks have failed over the last 10 years), but we are not expecting this to be the first of many steps on the way to a systemic crisis.

LPL Research’s analysis of banks and savings and loan institutions in the Russell 3000 Index points to unique operating aspects of Silicon Valley Bank and Signature Bank, which we believe contributed to their downfall.  Unlike these banks, we believe many other banks operate with more operating and balance sheet flexibility that help better manage risk in their businesses. This is a key reason why we do not believe this will be a widespread issue.

What are regulators doing as a result of this problem? The U.S. Treasury Department, the Federal Reserve (Fed), and the Federal Deposit Insurance Corporation indicated that all depositors of SVB and SBNY will be made whole. The Fed also launched a new funding facility to support the banking sector.

What is LPL Research’ view on this issue? LPL’s view of the markets and economy is guided by our Strategic & Tactical Asset Allocation Committee (STAAC) and the senior LPL Research members within the committee. This committee meets weekly to analyze and discuss capital market conditions and adjust our market views accordingly. The Committee believes investors should react to the Silicon Valley Bank and Signature Bank of New York developments with some caution as sentiment around bank conditions remains fragile, and depositors in other banking institutions could react irrationally to the recent failures. 

We believe tactical investors should be maintaining their multi-asset allocations at or near benchmark levels.  For longer-term, strategic investors, we believe no changes to well-balanced allocations need to be made.

Importantly, we do believe overall conditions should improve based on regulator backstops, but recent damage to sentiment should be respected—at least for now.

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