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Silicon Valley Bank Failure

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The recent collapse of Silicon Valley Bank (SVB) has Wall Street in a panic about risks to the financial system. Nonetheless, we believe the risks SVB faces are unique, and do not necessarily have to feed through the entire system.

As its name suggests, SVB has a concentrated client base consisting of startups and venture-capital firms [1]. For some time, the bank had done well and its deposit base was trending upward. Its clients generated a ton of cash during the pandemic that led to a surge in deposits. As of the end of Q1 2020, the bank had a little over $60B in deposits. This number swelled to just under $200B by the end of Q1 2022 [1].

However, this changed as the startup industry faced challenges with fundraisings and IPOs. As a result, it became harder for SVB to attract new capital. Capital inflows turned into outflows. Deposits fell from $200B at the end of March 2022 to $173B at year-end 2022. And this decline only accelerated at the start of 2023 [1].

As customers withdrew deposits, SVB faced a liquidity crisis, forcing it to sell off securities (notably its Treasury securities) at a loss, and to raise $2.25B in capital. This led to further panic, as the share price crashed and customers ran for the door. On March 9th, customers tried to withdraw $42B in deposits, about a quarter of the total [1]. This led the bank to collapse as it ran out of cash. The U.S. regulators took control of the bank and hit the circuit breaker, limiting the fallout and preventing it from spreading further. The U.S. regulators guaranteed all deposits of SVB [2].

In terms of our bank exposure, in the U.S. we hold Bank of America, and in Canada we hold RBC. We believe these banks are well capitalized and do not face the same risks as SVB. The recent decline in their share prices is more psychological, and we remain confident in the business prospects at these banks. However, we believe the smaller regional banks in the U.S. will likely face some pressure.