SVB and Bank Collapses: Lessons Learned and What’s Ahead

In recent weeks, the closure of Silicon Valley Bank (SVB) and other banking institutions has raised concerns about the financial system’s stability. While these developments are worrying, it’s important to understand the context, the risks involved, and the potential impact on investors and the economy as a whole.

In this article, we’ll explore the lessons learned from the SVB closure and other bank collapses and what we can expect in the near future.

The Context: SVB and Troubled Banks

Silicon Valley Bank, a bank catering to startups, closed its doors on March 10th after it could no longer cover withdrawals¹. Days later, regulators also took over Signature Bank. Moreover, there’s reason to believe that a number of other banks may be in trouble². Rising interest rates are hitting many banking portfolios hard, and weaknesses are emerging.

However, it’s important to note that the affected banks are small in the context of the overall banking system. They also serve high-risk niches and have a lot of exposure to cryptocurrencies, startups, and other highly volatile asset classes³. Those risky assets can make them more vulnerable to bank runs and liquidity issues, which is what we’re seeing happen.

You can see from the chart above how small the two failed banks are relative to other, larger financial institutions⁴.

Lessons Learned: Warren Buffett’s Wisdom

As Warren Buffett famously said, “Only when the tide goes out do you discover who’s been swimming naked.” Adverse conditions expose vulnerabilities and risky choices. Many strategies can look brilliant when markets are booming, but you only sometimes know or appreciate the risks once conditions turn against you.

Clearly, a number of institutions are finding that out. There’s a lesson here for investors: understanding our actual tolerance for risk and our ability to withstand rocky times is critical. It’s hard to do when the sun shines, and life is good. But it’s a skill well worth developing because we can expect to experience bear markets, recessions, and uncertain conditions throughout our lives.

What’s Ahead: Potential Impact and Preparing for Uncertainty

Moody’s, a rating agency, reported that it’s watching several other institutions with potential problems². Some larger banks may also be affected, but it looks like regulators are stepping in quickly to protect the overall financial system.

However, uncertainty can cause market volatility, and we could see some new lows in the coming weeks. As investors, staying informed is important, assessing our risk tolerance and investment strategies and being prepared for potential storms.

The recent bank collapses, including that of SVB, are certainly concerning. However, they also provide important lessons for investors and highlight the importance of understanding risk tolerance and vulnerability in the face of uncertainty. While it’s impossible to predict the future, we can take steps to prepare for potential storms and stay informed about market developments.

Sources:

1. https://www.cnn.com/2023/03/13/investing/silicon-valley-bank-collapse-explained/index.html
2. https://www.cnbc.com/2023/03/14/moodys-cuts-outlook-on-us-banking-system-to-negative-citing-rapidly-deteriorating-operating-environment.html
3. https://www.cnbc.com/2023/03/12/regulators-close-new-yorks-signature-bank-citing-systemic-risk.html
4. https://www.washingtonpost.com/business/2023/03/13/bank-failure-size-svb-signature/

Chart source:

• https://www.washingtonpost.com/business/2023/03/13/bank-failure-size-svb-signature/

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