Although the March failures of Silvergate Bank, Silicon Valley Bank and Signature Bank initially raised concerns about the health of the entire banking system, investors have come to realize that these failures were due to firm-specific causes.  The overall banking system was, and continues to be, healthy.  Equally important, your Arbor portfolios were, and continue to be, managed with an eye to avoiding the firm-specific issues that impacted Silicon Valley and Signature.

What firm-specific issues contributed to these bank failures?  To answer this question requires an understanding of how banks function.  Banks gather deposits by offering to pay interest or providing banking services, such as checking writing.  To pay interest or provide services, banks must generate income from their deposits.  They do this by lending money or purchasing government bonds.

A bank’s investment decisions are complicated by the fact that depositors can ask for their money back at any time, which then requires the bank to sell some of its loans or securities with short notice.  Banks hold some short-term investments that have stable values for just this purpose.  Long-term investments typically offer higher rates of return.  However, their values fluctuate with market conditions.  Selling a long-term investment at the wrong time might require the bank to take a loss.  Banks must strike a balance between having enough short-term reserves to satisfy customers’ withdrawal requests and the extra income that can be generated by long-term investments.  Government regulations specify a minimum percentage of deposits that must be held in short-term reserves.  The percentage varies with the size of the bank, with the largest systematically important banks required to hold the highest percentage.

Most of the time, a bank can operate with a relatively small percentage of deposits held in short-term investments.  If the bank’s customer base is well diversified, in terms of account size and the economic sectors in which customers operate, deposits withdrawn on any given day tend to be offset by contributions.  A large mismatch between deposit withdrawals and contributions is more likely to occur when the bank’s customer base is concentrated either in a small number of accounts with very large balances or with a high percentage of accounts held by customers in a single industry.  Silicon Valley Bank’s customer base was highly concentrated in emerging technology firms taking direction from a handful of private equity firms.  When the private equity firms expressed concerns about Silicon Valley Bank, the emerging technology firms withdrew their deposits in mass, exhausting Silicon Valley Bank’s short-term reserves and necessitating the sale of long-term investments at a substantial loss.  The stories at Silvergate and Signature Bank were similar, though their customer bases were concentrated in firms and individuals active in the crypto-currency industry.

Clients invested in Arbor’s strategies had no exposure to these three banks.  The only banks held by Arbor’s strategies are JP Morgan Chase & US Bancorp domestically and Commonwealth Bank of Australia & ING Group internationally.

Both JP Morgan Chase & US Bancorp are classified as systematically important banks by the Financial Stability Board (FSB).  As such, they are subject to the highest level of reserve requirements and monitoring.

If you have any questions, please do not hesitate to call our office.  We would be happy to help with anything you need.




Notes & Disclaimers

We hope this document allows you to better understand the critical dynamics of your investments.

This report has been generated from information that Arbor Financial believes to be reliable and accurate.  We do not represent or warrant the accuracy or completeness of the information contained in this report.  As such, all opinions included in this report constitute our best judgment as of this date and may be subject to change.

Past performance is not a guarantee of future results. In fact, several studies suggest there is little or no correlation between past performance of specific investments and their future results.

Arbor Financial Services, LLC and its employees do not provide tax or legal advice. The Company strongly encourages you to consult with your own personal tax and/or legal advisors before making any tax or legal-related investment decisions.

Written by

Peter has more than 25 years of experience in the financial industry as a researcher, strategist, and portfolio manager.  As a portfolio manager at Arbor, Peter performs quantitative analysis on current and prospective portfolios.

Peter is a CFA charter holder.  He earned his PhD in Economics as well as dual Bachelors of Science degrees in Computer Science and Pure Mathematics from the University of California, Santa Barbara.

Before joining Arbor, Peter was a Founding Member of institutional money manager OakBrook Investments and worked there for 22 years serving in a variety of roles including portfolio manager, Director of Research, and co-Chief Investment Officer.  Prior to forming OakBrook, Peter worked at ANB Investment Management & Trust Company as a strategist, portfolio manager, and Head of Research.

Peter has lived in Lisle, Illinois since 1997.  Outside of work he enjoys sports car racing and is an active member of the Autobahn Country Club in Joliet, Illinois and the Sports Car Club America (SCCA).