We are sharing our perspective on the recent news that Silicon Valley Bank (SVB) entered FDIC receivership on Friday.
The rapidity with which this occurred surprised the market, as it was a highly unusual action taken by the regulators.
A few points and action items are worth noting.
- Howland Capital (HCM) has no direct exposure or relationship with SVB. Our firm does not bank with SVB nor do we have any client assets custodied with the bank.
- As a reminder, we custody all client assets at National Advisors Trust (NatCo), which is a Federally chartered and regulated trust and custody bank. NatCo has no demand deposits (i.e. checking or savings accounts) and does not make loans to customers.
- As you are likely aware, all cash balances at HCM are held in a Cash Liquidity Program (CLP), which allows for daily liquidity, generates what is presently an annual yield of 4.45% and is FDIC insured. We have been experiencing a steady inflow of clients consolidating their cash balances with HCM to take advantage of the CLP’s attributes.
- We have confirmed with NatCo that there are no cash balances in the CLP held at SVB. Even if there were, they would be fully insured and available for withdrawal because of the structure of the CLP.
- While it remains to be seen what knock-on effects this event will have on the financial/banking sector, in large part it is an isolated event, given that SVB operates primarily in California and Massachusetts (the latter exposure as the result of their acquisition of Boston Private Bank & Trust in 2021).
- We are in the process of connecting with any HCM client who has a banking relationship with SVB – most if not all of whom had legacy Boston Private accounts. We also are in the process of stopping any scheduled remittances to SVB client bank accounts until further notice.
- The loan profile for SVB is highly concentrated in the technology/biotechnology/startup sectors which, when coupled with a relatively limited retail funding source, resulted in a classic asset-liability mismatch. This required SVB to sell assets at distressed prices in order to meet depositor demands for liquidity and ultimately pushed it into receivership.
- The FDIC has indicated that all insured deposits (up to $250,000) will be available to customers as soon as Monday. Balances above that threshold will be paid out over time based on the FDIC’s ability to liquidate the remaining assets and loan portfolio. It is impossible to know at this time, but past experiences would indicate those payouts of balances could be between $0.60 and $0.80 on the dollar. But again, it is much too early to tell.
- Because First Republic Bank (FRC) has a similar geographic footprint as SVB, concerns have been raised as to its ongoing strength and viability. Keep in mind that First Republic has a much different asset and liability framework, which reduces its operational risk. With that said, we are monitoring the situation closely as some client portfolios own stock in FRC and we have many clients with banking/lending relationships there. It is quite possible that FRC ends up a net beneficiary of SVB’s receivership, as clients move their banking relationships from SVB to FRC. Time will tell.
- We have also been in close contact with the general partners of various venture funds that are held by clients as well as our own HCM venture funds. Initial feedback is that exposure through these funds and/or underlying portfolio companies is limited, and the risks are manageable, but we will obviously be monitoring this exposure as things unfold.
Finally, please feel free to contact your Howland Capital portfolio manager with any questions or concerns about this situation. We are here and as always, ready to serve you.