Wealthtech CIOs Discuss – Is Silicon Valley Bank Contagious?

Julius Buchanan, Managing Editor, Wealth Solutions Report

Orion And Helios CIOs Discuss Reasons Behind SVB’s Collapse, Whether It’s Contagious And A Silver Lining

With the world watching in real time as a modern-day digital bank run brought Silicon Valley Bank (SVB), which is intricately connected to the tech sector, to its knees, and the wealthtech space watching from the sidelines as the T3 Conference unfolds, we reached out to wealthtech experts to ask their assessment of this rapidly evolving situation.

The Reasons SVB Failed

Tim Holland, CIO, Orion

Addressing the reasons for the failure of SVB and New York-based Signature Bank, which failed just a couple days later, Tim Holland, CIO of Orion, said, “We do think the dynamics that led to the failure of both banks were specific to both banks, including meaningful exposure to clients in the digital assets space.”

Holland attributes SVB’s failure to, “an undiversified depositor base and poor balance sheet and securities portfolio management that saw the company recognize massive losses on the forced sale of investment securities.”

Joe Mallen, CIO, Helios Quantitative

Joe Mallen, CIO at Helios Quantitative, pointed to several reasons for the failure, “Purchasing Treasurys to obtain yield, accounting practices and lack of impairment, concentrated client base and rating agency trust are just a few topics gaining scrutiny.”

Is SVB Contagious?

 “The failure of SVB was largely unforeseen. It brings the strength of our banking system into question when we’ve consistently been told they’re all very well capitalized,” said Mallen, pointing out how SVB’s failure revives memories of the Bear Stearns collapse. 

“If other banks continue to fall, the probability of a recession increases significantly,” Mallen said. “We’re watching market moves this week to see if contagion spreads across other banks and equities. We’re concerned with not only the banking system but also broader consumer confidence that could further weaken an already unstable economy.”

Holland takes a view that the SVB failure will not have a broader domino effect. “While not being dismissive of the second and third largest bank failures in the history of the United States, we don’t believe the developments at Silicon Valley Bank and Signature Bank are indicative of systemic risk for our economy and markets.”

“If we had to point to reasons as to why the U.S. economy and capital markets aren’t at risk of a financial contagion, why they aren’t facing systemic risk today, it would be the amount of capital held at major banks and capital markets companies, and the general health of the U.S. economy, particularly residential real estate,” Holland continued. 

“Coming out of the Global Financial Crisis, regulators, including the U.S. Federal Reserve, put in place extremely rigorous capital requirements for systemically important financial institutions,” Holland explained. “The Fed went on to stress test their balance sheets and business models on an annual basis to ensure they could manage through a severe economic downturn. All institutions passed the Fed’s 2022 Stress Test.”

A Silver Lining

Mallen concludes with a possible silver lining scenario, if “this is the catalyst that forces the Federal Reserve to pause its interest rate increase cycle and lower its terminal rate. This scenario may be bullish if the banking system holds strong.” 

Julius Buchanan, Managing Editor at Wealth Solutions Report, can be reached at jbuchanan@wealthsolutionsreport.com

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