Events of the past week – high-profile collapses at Silicon Valley Bank and Signature Bank and rescues of First Republic Bank and Credit Suisse – have increased anxiety regarding the health of the global financial system. The situation is evolving rapidly and requires investors to remain well-informed and prepared to respond quickly. At this point, central banks and large global banks have intervened and seemingly put a stop to bank runs. That said, it is difficult to estimate the magnitude of the damage done and the potential for further fallout so investment outlooks must be updated to account for this increased uncertainty.
Most importantly, Marietta clients did not own stock in the four failed banks. Nevertheless, we’ve tracked developments closely and taken steps to shield portfolios from possible contagion. We’ve reviewed all firm investments in bank securities, reduced exposure to money market funds that contain bank promissory notes, and increased holdings in US Treasuries.
A Broader Perspective
Banks can fail for a number of reasons, including mismanagement of funds and/or inadequate risk management practices, as was the case at Silicon Valley Bank and Credit Suisse. They are more common than one might expect. In the past decade, there have been 71 FDIC-insured bank failures. Of course, none were large enough to merit government intervention. In isolation, a bank failure is not a direct indicator of a broader economic slowdown. However, if it leads to significant collateral damage throughout the financial industry, a tightening of credit markets and declining consumer confidence could inhibit economic growth.
A Look Ahead
These developments have made our outlook more cautious but, for the moment, we do not anticipate a full-blown crisis as was the case in 2008-09. We will continue to monitor economic indicators and the broader market for signs of contagion and systemic risk and remain prepared to take further action if necessary. For now, we advise investors to stay focused on long-term objectives. We will provide additional commentary in our upcoming Economic and Financial Market Outlook.