The news has been flooded with stories of recent bank failures. As a shareholder, you may be wondering what’s happened and how it affects you. We have summarized information from the affected banks and/or various news sources to provide an overview. We hope you find these frequently asked questions helpful.
Q: What banks have failed?
A: Silicon Valley Bank (SVB) was a commercial bank that largely served venture capital firms and early-stage technology and life sciences companies, as well as California’s premium wine industry. The California bank, which was a subsidiary of SVB Financial Group, was placed in receivership under the Federal Deposit Insurance Corporation (FDIC) on March 10. SVB is not approved for investment and is not held by any of the Domini Funds.
Following SVB’s collapse, other regional banks with high levels of uninsured deposits experienced similar fear-induced withdrawals. On March 12, state regulators closed Signature Bank, a New York-based bank reported to have exposure to cryptocurrency clients. Like SVB, Signature Bank has entered FDIC receivership. As of December 31, 2022, Signature Bank represented 0.03% of the Domini Impact Equity Fund’s portfolio.
Although it has not been closed by a federal or state banking regulatory agency, Silvergate Capital Corporation, the parent company of Silvergate Bank, also announced last week that it will be winding down operations and liquidating assets. Silvergate is a small California bank that primarily serves the cryptocurrency industry, which has recently come under increased regulatory scrutiny and legal challenges. Its voluntary liquidation is being supervised by the state of California, and the company has not entered the FDIC’s receivership program at this point. Silvergate is not in our investable universe and is not held by any of the Domini Funds.
Q: Why did SVB collapse and what will be the impact on other banks?
A: SVB’s collapse last week came after months of elevated cash burn, as bank clients—particularly technology startups that have experienced a decline in venture capital funding—withdrew funds at a faster-than-expected pace to fund business operations. A significant portion of SVB’s assets had been invested in long-dated bonds that declined in value over the last year due to rising interest rates (as bond yields and prices move inversely). On the evening of March 8, SVB announced that, in an effort, to shore up its balance sheet it had liquidated $21 billion of “available-for-sale” bonds at an estimated realized loss of $1.8 billion. Furthermore, it was seeking to raise approximately $2.25 billion through additional offerings of common equity and convertible preferred stock. Moody’s and S&P subsequently downgraded SVB’s credit rating and outlook, and concerned clients rushed to withdraw funds, sparking a classic bank run. The company’s stock dropped over 60% when regulators stepped in on the morning of March 10 and placed the bank in receivership under the FDIC.
Although many of the factors that contributed to SVB’s collapse appear unique, as the second largest bank collapse in U.S. history, it rattled markets and triggered a contagion of worry that spread across other regional banks and the broader financial sector. Liquidity concerns and fears of a widespread banking crisis prompted a rush by some depositors to withdraw funds, sparking large declines in financial stocks in the days following SVB’s collapse, particularly among stocks of other U.S. regional banks.
Q: What steps has the government taken to intervene?
A: The FDIC’s standard deposit insurance covers up to $250,000 per depositor, per insured bank, for each account ownership category. However, the Treasury Department, Federal Reserve (Fed), and FDIC jointly announced that all depositors at both SVB and Signature Bank, including those with deposits in excess of insured limits, will be made whole. In addition, the Fed announced a new Bank Term Funding Program (BTFP) that will offer one-year loans to banks at easier terms than it typically provides in order to meet deposit withdrawals. The Treasury will make up to $25 billion available to the Fed for the BTFP, but the Fed does not expect to have to draw on these funds.
Q: What happens next?
A: In general, banks are required to be capitalized in adherence with regulatory capital rules established after the financial crisis of 2008. The failures of SVB and Signature Bank, as well as the challenges faced by Silvergate, reportedly stemmed from those banks having insufficient liquidity to cover deposits attracted from cryptocurrency clients and other early-stage technology companies that have needed to draw down on their cash deposits. Banks with more diversified client bases are unlikely to experience the same degree of deposit attrition, and those that have appropriately hedged their balance sheets to account for rising interest rates should not be exposed to the same degree of losses on their bond portfolios. In addition, the actions taken by the government to guarantee deposits and extend additional funding to banks should help to alleviate liquidity concerns.
We will continue to closely monitor events as they unfold and evaluate any impacts to the Funds’ portfolios.