Bank Failures Spooks Investors – 3-16-2023

SVB Logo with red X

Three banks failed last week, but the fallout of Silicon Valley Bank (SVB) was the one that mattered. The other two were tied to the decline of the cryptocurrency industry. SVB was the bank for many small and growing businesses and was hoping to become publicly traded in the future. With the Federal Reserve rising interest rates and investor sentiment declining, the window for new public offerings “IPOs” has closed. This made SVB’s business customers draw down on bank deposits and forced the bank to sell bond holdings of investment grade issues at a loss to cover withdrawals. When investors balked at adding more capital to the bank, a “run on the bank” ensued and in a few days, the bank was taken over by the State of California regulators. Bank runs can occur much faster than in the day of George Bailey from It’s a Wonderful Life.

To stem further losses, the Federal Reserve and the FDIC will cover all depositors accounts. Bond and stock investors in SVB are likely to lose their investments. If the banking sector can avoid another failure over the next week, it will enable confidence to return.
The Federal Reserve has raised short-term interest rates from 0.25% to 4.75% over the past year. While they remain concerned that the rate of inflation is not falling as quickly as hoped, signs are emerging that business credit conditions are quickly tightening. Many corporate bank customers are seeing much higher interest rates and fees. At the same time, banks are challenged with office property losses and narrowing spreads between their lending rates and the interest they pay depositors, referred to as net interest income. This situation suggests that rising cost of borrowing funds for businesses will rise, and the economy will slow.

In the financial markets, Treasury bond yields have fallen dramatically in the wake of the SVB collapse. The 2-year bond yield has dropped from 4.7% to about 4%. The 10-year bond yield also has fallen from about 4% to 3.5%.

The drop in bond yields has supported the stock market overall, but the performance of the segments is dramatic. Smaller companies, financials, and real estate are feeling the most punishment. Larger companies, especially those with the strongest financial resources, are doing well, such as technology and biotechnology.
In client portfolios, we have exposure to Key Bank Preferred Stock, JP Morgan Preferred Stock, and the Preferred Stock ETF that are of concern. Preferred stocks are similar to bonds in that they provide a fixed dividend yield. Our largest financial holding, Royal Bank of Canada (RBC), is down about 5% over the past week. Royal Bank of Canada, a AA- credit rating, higher than JP Morgan. Last week, we sold many positions as the trading patterns were suggesting that a bearish momentum was building.

Despite the chaos in the regional banks and the increased risk of economic decline, the SP500 closed today only -0.16%, well off losses from over 1% earlier in the trading session.

Our investment strategy will be updated in the Client Letter for the 2nd quarter that should be distributed in about two weeks.


Business Continuity and Succession Plan Disclosure Statement

Andrew Hill Investment Advisors, Inc. (“AHIA”) maintains a Business Continuity and Succession Plan (“BCP”) that has been developed with the goal of protecting the health and safety of our employees and maintaining continuity of service for our clients. Our Plan is designed to ensure that we are prepared to operate through significant business disruptions, so that our clients can access their accounts without significant interruption under most circumstances.
Key elements of our BCP include the following:

  • Critical data from our computer systems is backed up daily to geographically remote, secure facilities.
  • All AHIA employees can access its computer data remotely via secure connection. If AHIA’s primary network is not accessible, AHIA maintains replicas of all files and database servers in a geographically remote disaster recovery network available to all employees over a secure connection.
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  • We maintain an emergency contact list and procedures updated and distributed on a regular basis.

If your account requires servicing during a significant business disruption and we are unable to assist you, please call Fidelity Investments at 1-800-523-1203 and a dedicated team member will be able to assist you. It is impossible for us to anticipate every potential problem that may occur, but we believe our BCP will enable us to conduct business in the event of a variety of possible business disruptions. We review and test our BCP at least annually and it is subject to modification based on changing circumstances and assessment of need.

As a fiduciary, AHIA has certain legal obligations, including the obligation to act in client’s best interest. AHIA seeks to avoid a disruption of service to clients in the event of an unforeseen loss of key personnel, due to disability or death. To that end, AHIA has entered into a succession agreement with The Colony Group, LLC, effective May 24, 2019. AHIA can provide additional information to any current or prospective client upon request to Andrew D.W. Hill, President at 239-777-3188 or [email protected].

Andrew Hill Investment Advisors, Inc.
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Andrew Hill Investment Advisors, Inc. (“AHIA”) believes it is essential that we maintain the privacy of the nonpublic personal information provided to us and that we obtain in connection with providing our products and services to clients.  AHIA views protecting its customers’ private information as a top priority subject to the requirements of the Federal Gramm-Leach-Bliley Act.  AHIA has instituted policies and procedures to ensure that client information is kept private and secure. 

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AHIA reserves the right to change these Privacy Principles, and any of the policies or procedures described above, at any time without prior notice. However, clients will be promptly provided with a current copy of our privacy notice upon material changes or upon request.  Active clients will receive a current copy of our privacy notice at least annually. These Privacy Principles are for general guidance and do not constitute a contract or create legal rights, and do not modify or amend any agreements.   If you have questions about this privacy policy, or if you wish to amend or rescind your written instructions with us at any time, please call us at (239) 777-3188.