What Happened With SI & SIVB

Today, we’re departing from our typical stock coverage to discuss the collapse of two prominent banks: Silvergate Capital (SI) and SVB Financial Group (SIVB).

Both are considered regional banks, though Sl doesn’t really fall into that category.

Their demise brought down lots of their peers, including PacWest Bancorp (PACW) and Zions Bancorp (ZION).

We’ll explain what happened, where there’s risk, and most importantly, where there’s opportunity.

In a Nutshell

The same problem undid both institutions: bank runs.

Banks take depositors’ money and either make loans or invest it in safe assets like U.S. Treasuries.

If depositors need their money back, banks can liquidate their investments or borrow from the Fed as a lender of last resort.

Silvergate Capital held money for crypto clients, while SVB held money for venture capitalists.

Both invested their money in U.S. Treasury bonds.

As interest rates rose, the price of those bonds dropped.

For most banks, this isn’t a problem. They just hold the bonds until maturity, usually months or a few years out.

But crypto and VC customers needed money now, forcing Silvergate and SVB to liquidate their bond holdings at huge losses.

When it got bad enough, Silvergate closed itself, and regulators closed SVB.

Don’t Worry About a Bank Run

The vast majority of banks are fine.

The Federal Deposit Insurance Corporation (FDIC) insures accounts up to $250,000 per depositor to shore up faith in the system.

So regular folks with money at SVB and Silvergate aren’t likely to see their cash disappear. Even crypto and VC companies aren’t likely to see huge losses.

Opportunities Abound

Investors sold stocks with exposure to VC or crypto customers, like PACW.

The sell-off creates opportunities in national and regional banks that have little or no exposure to either of these client bases.

Some quality names trading at a discount with healthy dividends include:

• KeyCorp (KEY): 8.4x price-to-earnings ratio, 5.0% dividend yield
• Regions Financial (RF): 8.7x P/E, 3.7% dividend yield
• Citizens Financial Group (CFG): 8.7x P/E, 4.6% dividend yield

Do Your Homework

Look where each bank invests its money.

Does it put most of it to work through loans, or is a significant amount in Treasuries?

When you see something like this from SVB that shows it’s invested heavily in Treasuries when rates are rising…

Source: SVB financials (arrow added)

…Run for the hills!