by Tom Bradley

We find ourselves in another banking crisis. The word ‘crisis’ may seem like an overstatement at this stage, but when it comes to banking, confidence and trust are crucial. Right now, there’s a crisis of confidence.

I won’t repeat what’s been covered in the media other than to say that the U.S. government was forced to bail out two banks — Silicon Valley Bank (SVB) and Signature Bank. I know little about the smaller Signature, but SVB doesn’t appear to be suffering from the credit problems that typically bring a bank down, at least not yet. Rather, it’s been hurt by balance sheet mismanagement. It was heavily exposed to U.S. Treasury bonds, which were in a loss position due to rising interest rates, and was highly dependent on the technology sector. It was a bad combination. Tech companies haven’t been able to raise new capital and were tapping into their bank deposits to cover expenses which in turn forced the bank to sell Treasuries and trigger losses.

As an aside, I find it hard to believe that regulators weren’t on to the problem sooner. SVB’s balance sheet mismatch and its troubled client base were well known on the street.

As I’ve reminded readers in the past, we need to be careful about reading too much into the initial reaction to a story like this. The big declines of other bank stocks may prove to be overdone, as may the benefits that come out of the resulting decline in interest rates. There are a lot of crosscurrents here and plenty of sorting out to do in the coming weeks.

The Steadyhand funds are underexposed to the banking sector and don’t hold SVB or Signature. On Monday, our equity funds had some stocks get hit by the uncertainty, but the Founders Fund was down only 0.22%. Our fund managers will be watching this closely and looking for opportunities to take advantage of the dislocations.

On a final note, if this crisis turns out to be a mere flair-up and contagion is limited to a few regional banks, this may prove to be a good thing for the banking sector. It will serve as a warning shot across the banks’ bows that their shareholders won’t react kindly to unexpected loan losses or unstable funding.

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