Insights

Last week, problems at California-based lender Silicon Valley Bank (SVB) and this weekend’s demise of Signature Bank (SB) have refocused investors’ attention on financial sector risks.

“The IPC Portfolio Management Team does not believe that we are in for another Lehman Brothers moment.” 

However, it is important to understand the issues at SVB and the broader implications for the global financial system and financial markets. 

How We Got Here

SVB appears to have racked up losses on its securities holdings, some of which it was forced to realize as deposits fell. It collapsed because of a liquidity crisis rather than solvency problems. A liquidity crisis occurs when a financial institution faces strains on the liability side of its balance sheet (rolling over loans, etc.) and, in relative terms at least, is easy for central banks to manage. While the specifics of every liquidity crisis will differ, the resolution almost always involves central banks acting as a lender of last resort. They have several tools with which to do this, including repo auctions, lending via discount windows, and outright asset purchases. While a liquidity crisis can cause turmoil in financial markets, the good news is that the hit to the real economy is often limited if policymakers respond quickly. 

In contrast, solvency crises pose a much graver threat to the real economy. These occur when the value of an institution’s assets falls below that of its liabilities – the Lehman moment. Accordingly, they create financial losses that some part of the economic system then must bear. If this happens on a large scale it can impair the entire system of financial intermediation and credit creation, which in turn can cause a sharp contraction in the real economy. Large and systemic solvency crises usually require the government to use its balance sheet to absorb the losses and recapitalize parts of the financial system. 

“We do not expect losses at commercial banks like SVB and SB to become a systemic issue.” 

Deposit insurance will prevent runs on most banks that rely more on smaller household deposits and, for those that need to raise cash, they can use the U.S. Federal Reserve’s repo facility and discount window or take a Federal Home Loan Bank loan to avoid realizing losses. Most banks have likely hedged their interest rate risk. However, the risk in the coming days is that fears about mid-tier U.S. banks start to spread and that initiates a run on those banks, causing the cash reserves to dwindle in the smaller banks, leaving them more vulnerable. We know that some banks have already been forced to tap the discount window in recent months.   

In the wake of the collapse of SVB ($215bn in assets) and SB ($110bn) – the U.S. Federal Reserve, U.S. Treasury, and the U.S. Federal Deposit Insurance Corp have acted aggressively to prevent a contagion from developing.

Under the systemic risk exception, Treasury Secretary Janet Yellen has instructed the FDIC to make whole all depositors with both banks out of its Deposit Insurance Fund (DIF), which currently has $128bn in it – i.e., not just those with deposits under the $250k threshold. All depositors will have access to their funds this morning (Monday). 

In addition, the Fed is introducing a new lending facility to supplement its existing repo facility and the discount window. Known as the Bank Term Lending Program (BTLP), the new facility will make loans of up to 12 months in duration to banks, credit unions, savings associations, and other types of depository institutions. Most importantly, the qualifying assets to be used as collateral for those loans will be valued at par rather than marked to market. The Treasury will use $25bn from the Exchange Stabilization Fund to cover any losses the Fed incurs from the BTLP.  

 “These are strong moves. Rationally, this should be enough to stop any contagion from spreading and taking down more banks.” 

But contagion has always been more about irrational fear, so we would stress that there is no guarantee this will work. 

The good news is that after the Great Financial Crisis of 2008-09, banks in general are better capitalized than in the past, meaning they are better able to withstand losses. In addition, financial and household leverage is much lower now than it was in 2007 in the major developed economies (Canada however is an exception – household leverage is $1.80 for every $1 of income – higher than it was for U.S. households in 2007).  A combination of lower asset prices and weaker economies is likely to cause further problems at individual institutions (such as those at SVB) but we don’t expect these to develop into a broader solvency crisis across the system. 

The savings and loan crisis, Asian currency crises, the bursting of the dot-com bubble, and the collapse of the housing bubble, which ultimately triggered a global financial crisis, were all, at least in part, triggered by the U.S. Federal Reserve (Fed) hiking U.S. interest rates. In many of those episodes, a recession rapidly followed. In this case, even if SVB & SB doesn’t trigger a broader financial contagion, it could still lead to a further tightening of credit conditions that tips the economy into recession. A favourite quote of mine about economic sentiment is by ex-Fed Chair Alan Greenspan, who noted in his autobiography “sentiment about the economic outlook usually does not shift smoothly from optimism to neutrality to gloom; it’s like the bursting of a dam, in which a flood backs up until cracks appear and the dam is breached. The resulting torrent carries with it whatever shreds of confidence there were, and what remains is fear.” 



Investor confidence is going to be tested in the coming weeks.  In addition, we believe that markets have not fully priced in the effects of slowing global economic growth and corporate profitability, as the hope of a soft landing had been the prevalent theme.  The full effects of monetary tightening are yet to be felt and, as a result,

"we believe that risky assets will come under renewed pressure over the next few months and fall back 10% - 15%."

Our belief is predicated on the following key points: 

1. While expectations for S&P 500 earnings have been pared back, they remain well above historical trends.  The drop from the peak hasn’t been significant.  Also, while there has been a significant fall in expectations for growth sectors, there have only been small changes in expectations for other sectors. 

2. The overall drop in expectations doesn’t appear to be consistent with the expectations of a mild recession. 

3. When earnings have fallen, markets typically don’t bottom out until three-to-six months before the end of the recession.  If our expectations are correct, we don’t see the recession in the U.S. ending until around Q3 of this year, therefore markets should bottom out through the spring. 

4. Markets tend to do well after they reach their low points when a recession has been reached.  If the market low is behind us (October 2022), then that would mean that investors are uncharacteristically looking 11 months ahead, rather than the typical three-to-four months before a recession ends. 



We reviewed all of our holdings over the weekend.

"Aside from a tiny 0.13% holding in SVB in MSCI ACWI index-tracking Counsel Defensive Global Equity, neither the Counsel/IPC Portfolios nor the IPC Private Wealth portfolios and SMAs have exposure to SVB or Signature Bank."

Titan Advisors, which manages a significant piece of the IPC Multi-Strategies Alternatives Fund in Private Wealth, conducted a counterparty review of all of its underlying portfolio managers on Friday and confirmed it has no direct or indirect exposure to either SVB or First Republic Bank, one of a handful of regional U.S. lenders under pressure this morning. 

In summary, the headline news is likely to be ugly over the next few months and financial markets volatile as a result.  At this time, we believe that any crisis that comes up as the financial tide goes out is likely to be liquidity related, not due to solvency issues.  Central banks are well equipped to deal with liquidity issues and therefore the financial impact is likely to be limited.  Markets will be volatile, but this storm shall pass.  We have positioned ourselves in anticipation of this storm and in time will use this “obstacle” as an opportunity to position ourselves for the next cycle. 

Sincerely, 



Corrado Tiralongo

Chief Investment Officer

Counsel Portfolio Services

Counsel Portfolio Services | IPC Private Wealth

Click Here to Read Our Forward-Looking Statements Disclaimer