After the SVB Collapse, Should People be Concerned About Banks?

SUMMARY:

The year 2023 has so far provided us with various news concerning the financial sector. Some good news and some not so good. Amongst these news are the Silicon Valley Bank collapse, and ESG investing being blocked by congress and then this bill vetoed by President Biden. Today, we majorly cover these two topics.

What is ESG?

Environmental Social Governance, also known as ESG has recently been in the news since congress voted to block ESG investing. ESG is in simplification a rating that each company can receive considering how they are able to help the environment, and how they conduct business as corporate citizens. If we look at companies in the S&P 500, most if not all of them have ESG ratings. 

Some Negative Points About ESG

The problem with ESG is that there are multiple criteria, and at the moment there is no uniform way of evaluating parameters for setting ratings. Many say that ESG is the future of investing and companies will eventually be rated as a whole in accordance to their ESG ratings. On the other hand, we believe that no matter what the new trends are, companies will ultimately only survive through profit. We always remind clients to be careful with the band wagon movement when it comes to investing. The news or current trends might not be what is most beneficial to your investment plans in the long run. 

Silicon Valley Bank Collapse and Recent Acquisitions

On another note, while the Silicon Valley Bank collapse happened earlier in March 2023, there have been more developments on this case. Many wonder how a bank that big could declare bankruptcy all of the sudden. The biggest reason for the collapse lies in the inverse correlation of U.S. treasuries and interest rates. For a long time we had very low interest rates, this allowed banks to invest depositors money in bonds for an extended amount of time, and receive good yield. However, as interest rates started to rise, bond prices  started to decrease.  Additionally, SVB’s depositor base was highly concentrated in Silicon Valley, which means their clients were mostly technology and venture capital firms. As these clients began to need capital, they started to become more concerned about their deposits in the bank. This caused a “bank run” and in only one day customers withdrew $42B dollars.

The Silicon Valley Bank Collapse sent shock waves across the country and all the way to North Carolina where a local bank, the First Citizens Bank won the bid and recently purchased all SVB’s loans and deposits. 

Should We Be Concerned About Banks Going Forward?

In summary, no. Other banks have a much more diversified customer base, which helps prevent a sudden collapse as we’ve just seen. However, the truth is that no bank would be able to give back money if everybody wanted to withdraw all their cash at the same time.  SVB did invest in the safest securities, but unfortunately they mismatched the time of maturity in the bonds held. In conclusion, as consumers we are left to do our own due diligence on the bank we choose to deposit our money. It’s important to understand FDIC and how much you are insured through it.