The big news in the past week has been the collapse of two banks. But Silicon Valley Bank and Signature Bank are not your friendly neighborhood lending institutions. Both take risks by loaning money to high-risk businesses, like early stage tech startups, and they attract very different depositors and investors as a result.
Of course, as news broke that the Fed was going to step in to protect investors from both banks, investors drew comparisons to the credit crisis fifteen years ago. But the environment then was very different from the environment today. Following a stock market meltdown at the start of this millennium, investors rediscovered real estate at a time when lending standards were lax. Stories abound of investors borrowing money for an investment property using little but a wink and a smile to secure their loan. Rightfully, the credit market collapsed under the weight of big bank stupidity and greed, and the effect rippled through the entire industry, affecting every community, because even some of the smallest and most well-run banks had exposure to similar low-quality loans.
It’s difficult to tell what other banks might be affected by the same challenges as Silicon Valley Bank and Signature Bank, but the number of banks is likely only a fraction of the industry. It’s important to remember that news travels fast and it is quickly absorbed by millions of people around the world. Investors react quickly and dramatically to news, especially when the news is bad or fear-inducing. That also means they overreact. What we see in the markets today are emotionally charged decisions being made by fearful individuals. Unfortunately, these things happen frequently. Fortunately, they rarely amount to much and they often translate into wonderful buying opportunities.
For us, it’s worth watching and monitoring what happens with the Fed, interest rates, inflation, and the banking industry, especially as it relates to some of the more aggressively positioned lenders. But the banks we own tend to be profitable, have good cash flows, and have diverse offerings so that even if one area of their business isn’t working as well, they have others to pick up the pace.