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Silicon Valley Bank: Managing Contagion In The Banking Sector

On March 10, 2023 the FDIC was appointed as receiver of Silicon Valley Bank (“SIVB”) based in Santa Clara, California. This is the largest domestic bank failure in more than a decade. How a bank with a $20 billion equity market cap just a month ago, could collapse so quickly is a stark reminder of how relatively rapid interest rate increases may affect an institution that was ill equipped to handle these conditions. Despite the Fed’s widely telegraphed path for interest rates, SIVB held approximately 78% of its portfolio in longer dated US government backed securities, designating these as “Held to Maturity (HTM)”. This meant that although the value of these securities was negatively impacted by rapidly rising rates, they were not “marked to market”. The balance of its portfolio was held as “Available for Sale (AFS)” which requires daily repricing. If the HTM portfolio was marked-to-market on 9/30/22, the loss would have been 1.35x greater than the bank’s tangible common equity. Banking regulators usually refer to a bank in this condition as insolvent.

Negative sentiment steadily built until a late week torrent of withdrawals forced the bank to seek additional capital on an emergency basis. With capital becoming more scarce and increasingly expensive, SIVB clients began to rapidly withdraw capital. The liquidity drain forced sales of depressed fixed income securities (prices of bonds decline as rates interest rise), and news continued to spread that SIVB was in trouble. After SIVB’s desperate attempts to raise more capital failed, it was only a matter of hours before the FDIC took over. After initially promising only to guarantee deposits within the $250,000 FDIC insurance limit, the Treasury and the Fed have now announced that they will guarantee all deposits regardless of size. https://home.treasury.gov/news/press-releases/jy1337. At this writing, these guarantees were applied to SIVB and the just shuttered Signature Bank of New York (“SBNY”). It appears that the Fed will similarly backstop other institutions experiencing similar liquidity issues; accept their portfolios as collateral for short term funding.

The Fed is clearly trying to stabilize what appears to be short term liquidity timing difference. Regardless, retail and institutional depositors alike have been motivated to review concentrated cash deposits and consider using mutliple institutions to mitigate risk. Note that Money Market funds are considered securities, not deposits that might be restricted by an institution’s insolvency.

The last few days, we have fielded many inquiries relating to recent events and their affect on your 5C managed portfolio? 5C has no direct exposure to Silicon Valley Bank and very limited exposure to regional banks that might be experiencing liquidity issues. Our main custodians have provided assurances that they have no significant exposure to SIVB and no liquidity issues. One important distinction from 2008’s financial crisis is that this is not a credit quality problem, but rather an interest rate and duration problem. The government has indicated that it will provide sufficient liquidity for all government guaranteed debt regardless of current market price; this should relieve pricing pressure on collateral.

We continue to emphasize diversification across asset classes; our bias within the fixed income space has been towards shorter-term high grade fixed income which should provide near term stability for our managed portfolios. We note that buried under the headlines of SIVB’s receivership were unmistakeable indications that the overall US economy and its labor market remain robust. In our opinion, this strength will make the SIVB debacle an unpleasant but non-systemic episode and the Federal Reserve may pause but will not abandon its anti-inflation fight.

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Over the last fifteen years, US Stocks have significantly outperformed foreign stocks leading many investors to question their place in the portfolio. Despite this outperformance, our investment team remains forward-looking and anticipates a reversal.To gain insights into their perspective, we invite you to watch this excerpt from our latest webinar featuring an explanation by Kevin McCabe.5cwealth.com/international-equity-markets-update-june-2023/Please do not hesitate to contact us at any time with questions at 347.331.0648 or via email at info@5cwealth.com.#financialmarket #financialadvice #inflation #financialliteracy #capitalmarkets #banking #401k #financialfreedom #foreigninvestment ... See MoreSee Less

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5C Capital invites you to attend their upcoming webinar.Tuesday, May 16, 2023For Sessions at Noon EST and 7pm ESTDuration: 30 minutes plus Q&A session followingThe following topics will be discussed:• US Debt Ceiling, fiscal & monetary policy impacts on your portfolio• Protection of your investment assets given recent banking crisis• Financial Planning during periods of high inflation• Tax & Retirement law changesRegister for the Tuesday, May 16th - Noon EST webinar at:events.r20.constantcontact.com/register/event...Register for the Tuesday, May 16th - 7:00pm EST webinar at:events.r20.constantcontact.com/register/event...For more information, please email us at: akonigsberg@5cwealth.com#webinar #financialmarket #financialadvice #inflation #financialliteracy #capitalmarkets #banking #401k #financialfreedom ... See MoreSee Less

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New York Office: 707 Westchester Avenue, Suite 210, White Plains, NY 10604 I 347.331.0648 I Fax: 347.331.0647

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Note to All Readers: The information contained herein reflects the views of 5C Capital Management, LLC and sources believed by 5C Capital Management, LLC to be reliable. No representation or warranty is made concerning the accuracy of any data compiled herein. There is no guarantee that any projection, forecast or opinion in these materials will be experienced by any client. Past performance is neither indicative of, nor a guarantee of future results. The views expressed herein may change at any time. These materials are provided for information purposes only and may not be construed as investment, legal, tax, accounting, planning and or consulting advice. The information contained herein does not evaluate or make recommendations regarding your specific investment objectives, financial situation and circumstance. When evaluating this material for purposes of making any assessment concerning 5C Capital Management, LLC, consider discussing your specific situation with other professionals prior to making any decision. Any information contained herein may not be construed as 5C Capital Management, LLC sales and or marketing materials and is not an offer or solicitation for the purchase or sale of any financial instrument, product, planning or consulting services sponsored or provided by 5C Capital Management, LLC or any representative of 5C Capital Management, LLC. Any references to specific securities, asset class, planning and consulting considerations are presented solely for illustrative purposes and are not to be considered recommendations by 5C Capital Management, LLC. 5C Capital Management, LLC may have positions in and or may affect transactions in, markets, industry sectors and companies described herein.

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