Today, the news cycle is focusing on two California banks that have closed their doors. Silicon Valley Bank was closed today by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver, while Silvergate Bank has shut its doors and begun liquidating its operations. We want to take a moment to update our clients on the situation and address any concerns or rumors you may hear.
While these two banks are in trouble, they do not represent the health of the larger banking and financial sector. Silicon Valley Bank and Silvergate Bank banking activities are not typical and operate in specific higher risk areas of the lending market. The traditional and large banks that are the backbone of the financial services industry in this country are not experiencing the same problems that these smaller and highly specialized banks are. We do not anticipate greater contagion in the banking system stemming from the solvency issues at these two institutions.
Silicon Valley Bank and Silvergate Bank are smaller institutions, and both fall below the Dodd-Frank Act’s $10 billion threshold for annual Comprehensive Capital Analysis & Review (CCAR) stress testing. As such, they did not undergo regular stress tests in the manner that larger, more systemically important banks do. These larger institutions have significantly different balance sheets than they did heading into 2008-09. 2022’s CCAR tests were also particularly onerous, with dire stress testing assumptions that JP Morgan CEO Jamie Dimon famously called “capricious.” Even still, large American banks were able to withstand these stress tests, in some cases with flying colors, indicating their increased safety standards since the Great Recession.
Coming into 2023, many bank executives have been clear-eyed about the new higher-rate environment and potential risks, and have already taken preemptive steps to tighten their lending standards and increase their allowances for potential loan defaults independent of today’s news.
Silicon Valley Bank (NYSE: SIVB) largely functions in the niche area of venture lending, which is distinctly different than the lending carried out by traditional banks. The bank primarily caters to venture capital funds and their respective portfolio companies, making loans both to venture capital funds as well as venture-backed companies. Loans to venture-backed companies are often made at early stages when companies are not yet turning profits, making them intrinsically riskier. Most traditional banks do not engage in this type of lending.
While Silicon Valley Bank’s closure will have ripples throughout the venture capital industry, it is unlikely it will have contagion effects on larger, more traditional banks and lenders in the broader financial sector.
The former, Silvergate Bank, has already been in the headlines and struggling to shore up deposits for some time because of its entanglement within the Cryptocurrency industry. One of the bank’s largest depositors, FTX, the now bankrupt crypto exchange founded by Sam Bankman-Fried, caused a run on Silvergate Bank’s deposits after FTX’s failure sent the cryptocurrency markets into disarray. The liquidation of Silvergate’s banking arm marks the final blow for the already-struggling crypto-oriented firm.
Condor views these closures as one-off niche failures due to each banks’ involvement in riskier industry capacities. Further, we do not envision the contagion of bank runs, as more traditional and larger lenders have more diversified portfolios and significantly more stable balance sheets.