Strikes, Shamrocks, And Systemic Risk

If I did not have bad luck, I would have no luck at all.

Having prepared thoroughly for two weeks of client visits in England and Ireland, I found my materials rendered nearly irrelevant by the developing banking crisis. Clients were pressing for insight and answers that were difficult to come by. Work related to the evolving stress required a long string of consultations, many of which ran deep into the European evenings.

Further, transit strikes made traveling from place to place in London a challenging guessing game. Getting around Dublin was only marginally easier; I arrived on a long weekend that included St. Patrick’s Day and a major rugby match between England and Ireland. Some key thoroughfares had been taken over by revelers.

Nonetheless, the time spent on the road proved beneficial. As always, the exchanges with clients were illuminating. I thought it would be useful to summarize the content of the conversations for broader consumption.

1. Even though I was more than 5,000 miles away from Northern California, I got a lot of questions about Silicon Valley Bank (SVB), and whether other banks are at risk.

As we discussed a couple of weeks ago, SVB’s troubles began when Fed tightening caused the cost of its funding to rise much more rapidly that the yields it was earning on its assets. A significant contributing factor to the imbalance was the erosion of the SVB deposit base, a trend that began in early 2022. Capital available to technology companies began to diminish last year, leading them to draw down their bank balances. SVB’s concentration to this sector made it particularly vulnerable to funding loss.

By all accounts, SVB miscalculated the longevity of their deposits; when money began to depart, the bank had to sell some of its long-term securities at a loss. The panic that followed was fueled by private communications channels, social media and the prevalence of mobile banking. Ironically, those platforms were created by Silicon Valley firms. SVB’s surroundings, so important to its growth, may have contributed to its downfall.