Episode 147 - Marks on the Markets: Faithfully Thinking Through SVB and the Recent Banking Crisis
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The collapse of institutions like Silicon Valley Bank sent ripple effects around the world and brought many to a place of fear, doubt, and instability.
So how should we faithfully think through these recent events?
We tackle this topic on this special episode of Marks on the Markets.
Host John Coleman is joined by Justin Speer, a Principal and Senior Analyst on the Public Equities team at Sovereign’s Capital, and Zack Mansfield, who has over 15 years of experience working with high growth entrepreneurs, venture capitalists, and other members of the innovation economy.
As the current Managing Director of Venture Banking Group at Signature Bank, Zack has a deeply personal connection to this conversation.
Join these three as they wrestle through challenging questions and discuss how they have found hope in Christ despite the instability surrounding all of us.
All opinions expressed on this podcast, including the team and guests, are solely their opinions. Host and guests may maintain positions in the companies and securities discussed. This podcast is for informational purposes only and should not be relied upon as specific investment advice for any individual or organization.
Episode Transcript
Transcription is done by an AI software. While technology is an incredible tool to automate this process, there will be misspellings and typos that might accompany it. Please keep that in mind as you work through it.
John Coleman: Welcome back to the Faith Driven Investor podcast for our monthly Mark's on the Markets episode. This is John Coleman and I am very privileged to have with me today two guests to speak about the banking crisis, the recent banking crisis that's kind of erupted over the course of the last several weeks. Obviously, this is still real time, although some of the biggest movements have settled a bit. And we're trying to figure out what happened as well as what the banking sector will look like moving forward, what venture banking might look like moving forward, and how investors in Faith Driven Investor should think about the marketplace to explore this topic. I'm really privileged to have two guests on the podcast today. The first is Justin Speer. Justin, who was one of the portfolio managers in public equity at Sovereign's Capital. I've been privileged to be getting updates from Justin throughout, and he's just a really wise person on public markets generally and also on what's happening in the financial markets right now. The second is Zack Mansfield and Zack, maybe new to some of you, but he's not new to us at sovereigns. He was one of the original architects of the firm, one of the original investment committee members, and is one of the most senior executives in venture banking in the country. And Zack is currently hoping to lead the venture banking group at Signature Bank, which has obviously been a part of the news that's come out over the last several weeks and and will be able to provide us with just an extraordinary insider's perspective to this as well as a perspective on the banking sector generally. So Zack, Justin, thank you so much for joining today.
Zack Mansfield: Good to be here.
John Coleman: Well, and I know I should note upfront, we're going to talk about a lot of real time issues right now. These are not advice to buy or sell securities. They're not advice on where you should bank or how you should bank. But we do want to try and visit this topic. And and the first thing I want to dive in on before we try and dissect what's happened is just where we stand today. And maybe, Justin, we could start with you. You know, the last couple of weeks have been very rocky, but where does this mini financial crisis that we've experienced stand today?
Justin Speer: Well, we're certainly not out of the woods, but it now appears that some of that fevered panic has been quelled by some important moves from regulators, the Fed, and from large banking institutions. In the past couple of weeks. They've done some things that we'll discuss today in more detail a bit, but their efforts have been very important in quieting some of the fever panic that was cropping up across multiple lenders.
John Coleman: That's great. And I think we've seen that in some of the stock prices leveling of these banks that have swung so wildly and they're still down pretty precipitously, especially the regional banks. But those prices seem to be swinging with less volatility at the moment. Is that accurate Justin?
Justin Speer: Correct. Yeah, we've seen significant pressure. We've seen 20% declines in regional banking equities with the most challenged banks. And we'll talk about those banks down 90 plus percent, but we've stabilized here. The broader regional banking index has stabilized here in recent days, and we've learned that deposit outflows and withdrawals have begun to stabilize as well, which is a real good sign. After about 5% withdrawals from banks U.S. wide in the week following the two bank closures. So we've seen some stabilization. A real important thing that we'll be watching very closely in the coming weeks and months.
John Coleman: That's right. We've ended up with effectively three major bank failures that happened really in the course of that first week and subsequently haven't experienced any major failures. We've seen SBB sold to first citizens now and stabilizing the infrastructure that's left there. Zack, obviously you work at Signature Bank, which the FDIC took over over the weekend subsequent to the Silicon Valley Bank failure. What was your personal experience like there, if you wouldn't mind walking us through that?
Zack Mansfield: Yeah, it was a really wild few days. It turned into a week or two. I was actually traveling. My kids were on spring break. We had just gone over to the UK, we were in London and then we left on a Wednesday evening and the news was just coming out that I should be was looking into and I think ended up announcing plans to do a stock offering to help cover some of their issues on their balance sheet related to the securities portfolio. And that was big news. My experience over the last 17 years or so has all been in the venture banking world, and that should be is really the proverbial 800 pounds gorilla in that space. They dominated the market. And to see that was really huge news for us because they had been such a steady, you know, powerful bank and we knew it was going to hit their stock price. And yet the reaction to that was fairly immediate. And there was a lot of, you know, basically panic and concern from their customers who then started to pull deposits. And that just started this ripple effect and we began to see it the next day. So on the Friday of that week, we all remember we actually be started to really experience those outflows, all of the banks, including ours. I think most of the regional banks started to experience similar questions from client. Around the stability of other banks. And so our team really started working feverishly with really one main goal, which was to try to make sure that our clients deposits were as safe as possible. And really, that was, I think, the one kind of resounding message from every bank was like, we really care most about the deposits and making sure people feel safe. And there's a bunch of different ways that we could look at doing that, including certain products that we had and had been offering clients and were, you know, in an effort to try to get more people into those fully insured products. And really it was a whirlwind of that day where everyone was trying to do as much as they could to get into the weekend and sort of everyone did. And at that point SVB was taken over and then everyone had a chance to breathe a little bit, and yet everyone knew that it was fairly unstable still. And so, you know, I guess I'll stop there. It was wild, it was hectic. Our teams who were dealing day to day with clients, I had a guy tell me yesterday he opened nine months worth of insured cash sweep products for customers in five days. It was that sort of volume and just frankly, incredible, incredible efforts by folks, you know, in the trenches to deal with this madness. And yeah, so in some ways, it was really heartening to see everyone pulling in the same direction. And yet in other ways, you know, it was kind of mad.
John Coleman: Yeah. And I think that can get overlooked, honestly, in a crisis like this is people caricature institutions or segments of institutions. And my experience in general with a lot of these institutions, Signature First Republic, others included, is they're staffed by awesome people who really want to do the right thing, who want to serve clients. And that gets lost in the noise sometimes of a panic like this. And that's been disappointing, although predictable probably in the way that these things are reported on or reacted to. Exactly. If I might ask, on the personal side of things, you're a person of faith. I mean, it had to be a stressful weekend week, two weeks. How have you personally reacted to that or what have you leaned on during that time as a person of faith as you've endured it?
Zack Mansfield: Yeah, absolutely. Yeah. One of my first reactions, you know, really, frankly, with the SVB News, at first I mentioned they were just this behemoth was just this realization that like all of the institutions and things of this world that seem just so strong and powerful, like at the end of the day, are relatively fragile. All of our systems, all of our you know, that's not to say that there's not value in that. I think there's great value in them. And yet at the end of the day, there is a lot of fragility that was really exposed. A lot of it has to do with the interconnectedness of relationships and the ways that things can move at really rapid speeds nowadays. And so ultimately you have to choose how you're going to deal with that. You kind of touched on it a second ago. I was really heartened by the response of so many people. The immediate reaction is like you're in a sort of a crisis like this, is are you going to sort of deal with it emotionally and just kind of lose your mind and go crazy? Or are you going to dig in and, you know, strap together and work together? And you really did had a sense of being with others in a way that was different that you only experience when you go through crisis. And also it just opened people up. There was emotions, there was hurt, there was the ability to kind of come in and meet people where they are and do it in a way winsomely as you could, and do it in a way where you kind of do have to look at something beyond, you know, sort of the here and now in any sort of material. There's a lot of material wealth that was lost. And so you look at that and sort of say, well, what actually does matter? And, you know, for me it ended up being a chance to dig deeper into my faith and to understand what makes me tick and what really matters. And, you know, in a lot of ways like all sorts of things like this in life. They're really hard. And yet you end up with a little bit of time perspective to look back and with gratefulness, because you do realize that there are much bigger things in life. And I was on a spring break trip with my kids and, and it gave us opportunities to talk about what's going on. And this is what's going on with dad's work. And, you know, those are things that we don't take for granted, the opportunities to live intentionally in that and then talk about what is the reason for the hope that we have. And for us, you know, it's our faith in Jesus and in sort of the stability and long term internal perspective that that offers.
John Coleman: Yeah. Thank you for that perspective, Zack. And I know from my perspective, most of us have spent the last 20 years or so in financial markets. We've experienced a couple of crises during that time and probably been impacted in different ways. And when I've been impacting those crises, it's been such a reassurance to me to know that my identity is in something greater than my work in the present moment, which for a Christian is just the kind of distance that you need. I think to put things in perspective and certainly work hard for people, but also have comfort that, you know, your future is in the right hands. Justin, as we turn to you, just what happened several weeks ago at SVB, because we've you know, we kind of seen the outcome of that. But what happened? Was it bad assets? Was it a bank run? Was it both? What precipitated this crisis?
Justin Speer: It was a bank run. It was deposit withdrawals requiring the sale of assets that had unrealized losses. And so this isn't a credit performance issue. It's simply an interest rate and duration mismatch issue. Sizable unrealized losses were ultimately realized to pay off depositors, and it resulted in banks being unable to cover their uninsured and insured depositors. So $42 billion of deposits fled Silicon Valley in 6 hours was shocking speed. And we learned that there was an expectation that if they didn't shut it down. The FDIC thought another 100 billion would be gone The next day was just simply a mismatch in asset and liability duration and a significant surge in rates and draw down on deposits at some of these leading lending institutions that led to this thing really taking place. And Silicon Valley was really at the epicenter of the big shifts from extremely loose monetary policy that led to a big surge in deposits and risk appetite post-pandemic, particularly in the venture capital and startup realm. And that shifted because of inflation to extremely tight policy beginning last year. And unfortunately, Silicon Valley got caught up in that shift with just risk management that just didn't see this, unfortunately. And so when you see central banks tighten monetary policy, particularly the speed, that's what's really sets this one apart, the speed with which it tightened conditions, this has dramatically impacted the value of the longer term assets on banks balance sheets, including commercial residential mortgages and treasury bonds and other similar types of securities. And I've seen estimates of as much as 10 to 20% haircuts, unrealized losses on the held to maturity assets for banks. In aggregate, an estimated $2 trillion of unrealized losses are currently in the background here. This was very large. So if deposits don't flee, it's not a problem for the banks can help. The assets. The maturity and the value of those assets will mature at par. Supposing that they perform and right now they're performing again, it's not a credit risk issue, but if deposits flake, the depositors withdraw their money and banks are forced to sell those held to maturity assets to fund those depositors, this can lead to this mismatch. And if a bank's liabilities exceed the realized value of its assets, it can become insolvent. And that's what's happening.
John Coleman: Zack, Does that resonate with your understanding of what happened, and was it different between Silvergate SBB and signature in your mind?
Zack Mansfield: Yeah, I think that characterization is exactly right as it relates to SVB. Yeah, I think Silvergate had its own sort of story, which was definitely more tied up within crypto. They had defined a lean for themselves that was almost entirely, you know, correlated to crypto assets, you know, and then ultimately, you know, if you look at the ripple effect after SVB, their issue was as Justin described, and then the resulting sort of movement of deposits had the effect that it had on them. And then it did ripple down to other banks, including, you know, signature or some of the others. You mentioned First Republic. There was others that were in really all the regional banks that were, you know, at risk of the same efforts. And as you saw, you know, the Fed and others sort of step in. They were trying to provide support and liquidity and comfort to just stop that sort of changing of deposits every which way. And and that was really the thing that was causing this whipsaw effect. And really, yeah, the flight was happening too fast to respond to it, and they felt like they needed to step in and provide the stability.
John Coleman: And it really was in my mind, I agree with the characterization entirely. This is different than 2008, In 2008, we had a series of truly toxic assets, securitization of assets that was poorly understood, a crisis in the mortgage industry and inner linkages between assets that really put balance sheets at risk in a substantial way. For me, this was the kind of modern version of a 30 style bank run. And what was interesting is a lot of the things. That have made banking so much better, actually made the run so much easier. So from my point of view, frictionless banking, the ability to do banking anywhere at any time remotely on an app or online, you know, some of the banks that we've mentioned were extraordinary at that actually. Great customer service, great to deal with. You could move your money very quickly and you never had to visit a physical branch, right? The opposite of that is as easy as it is is to put money in. It's easy to take out. Right. The idea of, you know, in the 1930s, taken out 42 and a half billion dollars from a bank in 6 hours would have been literally physically impossible. And now, of course, it can move quickly. And then the second component of that is just social media and communication now. And I think, you know, originally one of the big problems, as I understood it, was a lot of the big venture firms started to hear about weakness or potential to tell each other about weakness, which became its own narrative. And then they have these Slack channels and the signal channels and other things where their venture portfolio companies were on and they started telling all their workers to withdraw funds at the same time, which is the source of these rapid deposit flights. And then that became too spread on Twitter, right. And other social media platforms. And so what was interesting and what is almost more difficult to deal with than toxic assets in some ways is this idea that a bank run can happen so quickly with modern technology and with social media. And what I still grapple with is how do you protect against that moving forward? Right. I mean, that type of run seems to be difficult to guard against.
Zack Mansfield: It's a really interesting point, John. I think you're spot on. And the thing that makes it so interesting is that each person that was involved, each person that was deciding to pull money out, was making that decision in a completely logical way, in a way that could be justified as a fiduciary, as you say, hey, I'm doing my duty as a board member to call my CEO and tell them, Hey, do you have money? That should be should you be thinking about pulling it out and you can make a logical case or even like this is your role, this is your duty as a fiduciary to make this case. And yet, as you interconnect all this together, it ends up spinning the hamster wheel faster and causing the issue that exists to just be exacerbated. And is this like you hear about flywheel effects that are positive, right, when a business really starts humming and this got it moving in a different direction in a negative way. And I really you know, so when people described it as prisoner's dilemma or ways where people are making it what they thought was a rational choice for themselves and yet collectively it wasn't good for anyone, and then really for the venture market, for the VCs and their portfolio companies, you know, SVB not existing in the form it did prior to this is not ultimately good for them, right? Like, we don't know what will happen with SVB within four systems, but the pain that this market has felt now is ultimately it's painful for the entire asset class, but is the unfortunate result of everyone acting in a way that they thought was sort of like in their best interest, but maybe not?
John Coleman: Yeah, and I think we'll come back to some of the longer term implications. But as you mentioned, Zack, apart from instability in the financial system, there's a whole sector that's dried up right now, at least temporarily, venture debt that played a role in the ecosystem. And that I think that's an under-explored element of this particular crisis, at least in most circles, because of the impact that that will likely have. You've both touched on some of the other banks that thus far have managed to survive, received support, and whether the crisis First Republic Park West, some of the other regionals. Justin, as those banks became the center of attention coming out of the weekend, so impacted SVB and signature, how did they survive that attention? What's happened so far that's allowed them to persist?
Justin Speer: Well, yeah, Before I get into that, I just a little perspective, just in the immediate, broadly aftermath of the SVB and signature failures, the pressure has really been more acute within the regional community. Banks small plates lost about 120 billion in deposits and a portion that led to large institutions the quote unquote, too big to fail institutions in the week following the seizures of Silicon Valley and signature. So those seizures again sparked fears of a potential for a run at other banks and net outflows of nearly 6% from all U.S. banks, all 4800 institutions. So there's been this particular focus on companies with a higher proportion of uninsured deposits. So deposits are the primary funding vehicle for these banks that make a spread on those low cost deposits, which they did lend out or put to work in other financial securities like U.S. Treasuries. So that reliance on the riskier, less sticky deposits was one of the things that really sealed Silicon Valley's signature state. I think they just carried a lot of risk. In hindsight, we came to find that 97% of Silicon Valley's deposits were uninsured deposits and 90% of signatures were uninsured. So in this current interest rate environment, that created real risk of deposit flight and even a hint of deposit flight when combined with the mark to market losses that we discussed on the asset side of their ledgers, it just led this uninsured depositor run. They made this rational decision, in my opinion, to flee, which left the banks with liabilities that outstripped their assets and that put them out of business.
John Coleman: But one interesting insight on that Justin just to interject, is I think the narrative has become, you know, Silicon Valley Bank, 97 and a half percent uninsured deposits were bailing out these wealthy people. The reality is, I understood it that basically the business model at those banks, the ones that came under pressure, was banking businesses. Right so dominantly the deposits that fled were not wealthy individuals. They were typically companies that were banking their deposits. And that was one of the big worries coming out, was not like, hey, we're bailing out the wealthy, although I'm sure there were some wealthy people there, but there were a lot of companies that, at least in our portfolio, that were worried about payroll coming into the weekend. Right. And that's been a misperception, I think, around the industry is like, oh, this huge number of uninsured deposits. But actually, as I understand it, the vast majority of those were business accounts with companies trying to meet payroll and things of that nature. Is that understanding correct?
Justin Speer: Yeah. So if you look at First Republic, their uninsured depositor base is lower than the two banks that went under. They're at 68% of their deposit base was uninsured. So still well above the industry average Park West is another one had about 52% of its deposits are uninsured, not too far from the industry average, but they're both regarded as capital providers to the venture capitalist startup community. So that was another stress point, as those companies tend to be heavier consumers of cash. The other thing going on in the background that we haven't talked about, the venture capital funding was slowing during this tightening phase when tech stocks were coming under pressure in terms of valuations. And so that also led to more consumption of the deposits, more deposit withdrawals from these entities that are consumers of cash. And so we learned last week that nearly 40% of First Republic's deposits were withdrawn from the bank, roughly about 20% at PAC West is what they disclosed. 20% of their deposits left the firm since the beginning of the year. So given the unrealized losses on the asset letter for those banks, their capital base came under significant pressure. And what we've also noticed is while depositors have been taking care of the equity holders and the bondholders have not, and so the equities have seen a lot of pressure positively outside of government intervention. For first Republic, we saw 11 of the big lenders, the consortium of 11 big lenders, including Jp morgan. They passed 30 billion of deposits at First Republic. And so that large bank stepped in to help inspire confidence, help stem some of the tide a further flight of capital from that institution. We've seen the FDIC and Fed step in with communications and facilities to help calm some of the fear and hopefully restore more confidence in depositors across the banking landscape. It still remains to be seen whether or not it will be enough to save the equity holders and some of these banks and some suspect that with some downgrades of first Republic to job by the ratings agencies, unfortunately, that a suitor may need to ultimately come in to fill the void.
John Coleman: Zack Maybe to dig in on a couple of those topics really quickly, Justin started to unpack what happened in the two weeks since both at the Fed and FDIC, as well as in the private sector, where some of these big banks have come together, effectively giving back some of the deposits that have fled First Republic onto their balance sheets. They parked back at First Republic. And I mean, it's worth noting we're talking about regional banks here. But first, Republic and Silicon Valley Bank were both a couple hundred billion dollars in deposits. These were very large institutions. The difference is there is a category of institution for our listeners who aren't familiar called systemically important financial institutions. I'm blanking on the exact threshold there, but they're basically the 12 largest banks in the United States. There's a set of global systemically important financial institutions, and effectively they accept higher regulation in return for an implicit government guarantee of their balance sheet. And so people view those as too big to fail. As you mentioned, Justin is a safe spot, which is why so many fled to these systemically important financial institutions. Zack, if you don't mind unpacking a bit more, picking up where Justin left off, what have federal agencies or entities done to try and stem the crisis and what have you seen happening at the banks as well?
Zack Mansfield: Yeah, I think I alluded to in one of my answers. Yeah, the real concern was how do we stem the deposit outflow and the ripple effect and how do we just sort of like stop the game of musical chairs so that everyone can just take a breath? That was really I think if you try to create the analogy, that's what they tried to do. And so they've done a couple of different things. They did step in after they took over signature and bridge and created the Silicon Valley Bridge Bank and signature Bridge Bank. They put not just implicit guarantees, but actual guarantees on any deposits that were at those institutions, which, you know, for us like what that meant for us was, you know, we were able to call our clients on that Sunday evening and say, here's what happened. This is what the FDIC is doing. And hey, by the way, what they've told us is all of your deposits are 100% FDIC insured or they're guaranteed. I'm not sure if they. Exactly which is FDIC insured, but which means they're safe. And what that meant is that allowed those companies who were companies who, you know, had lots and lots of employees who were trying to think through how do we make sure we can send payroll out on Monday? That was literally the exact conversation I had a dozen times, which was how do we make sure that we can send payroll out? Because that's what's really important and we'll solve for the other stuff later. And really, that was kind of the interesting thing, you know, underlies all this, is that, yes, these were quote unquote, startups or companies in the innovation community for the most part. But they really are the drivers of a lot of economic activity in this country. And the underlying employees are not the super wealthy venture capitalists, PE funds, etc.. They're just the folks who live in your neighborhood. It's the software engineer or the marketing manager or the sales development rep, and you just wanted to know if they were going to get paid. And so that's why the federal agency stepped in. And I think, you know, Justin touched on a couple of the banks also stepped in, and there's been really this thrust to say, hey, let's make sure that everyone knows that the banks are safe. And then beyond that, there's a much bigger conversation around regulation and all the the other parts of it. But really, I think it was about making sure that there was safety and then enough liquidity in the system that if there were more deposit outflows, that the banks could cover the liquidity either through borrowing from the discount window or from, you know, other federal entities.
Justin Speer: One of the approaches used by the Fed, in addition to the discount window, was that the bank term funding program that they installed, that was a new innovative feature that I thought was well-placed given the problem. So what they're doing is they're providing additional funding to banks by extending loans with a one year term limit to par value of eligible pledge collateral so banks can utilize their eligible help to maturity loans, which are currently trading below par value. The way I understand it is the Fed will lend them funds up to the par value of that underlying collateral that's eligible so they don't have to realize a loss on the books which would put them in jeopardy of running insolvent. But it was important facility and through last week I think institutions had drawn about $50 billion against that facility and over 100 billion, I guess, the discount window. So my question is, is that something that you're aware of and how does that work? What are the eligible securities that they will take?
Zack Mansfield: Yeah, that's for me. I don't know. I did read the same thing and I think it was really like, if you think about what happened to SVB, you know, if that program had been in place prior to when SVB went under the issue on their balance sheet around the market, they're held to maturity securities portfolio. They would have been able to access liquidity in a different way had that program been fully up and operational. And so I do think that that was a reaction to that. And so I think it was an interesting, you know, solution, unfortunately for us to be it was maybe a bit too late for them. But I do think it's an interesting piece as you think about the picture you painted earlier, which is these are ultimately not toxic assets. These are securities for the most part, you know, government, you know, backed effectively securities that will pay out at par over a long period of time and yet do the way you have to account for them. You know, there are unrealized losses on the balance sheet which do impact the bank's balance sheet.
John Coleman: And that's why this it's so interesting what people kind of understand and don't understand. To me, this is a feature of fractional reserve banking, right? I mean, this has been the case for hundreds of years actually, where in a model fractional reserve banking, where banks only are required to keep a small percentage of cash on hand to cover deposits, and then they lend out those others, which creates economic dynamism. Right. That's why it was invented in the first place, literally hundreds of years ago. But the weakness of that has been in a panic. There can be a bank run, right? I mean, you remember it's a Wonderful Life with people lining up outside Jimmy Stewart's bank. And I mean, this was a regular feature actually, in banking prior to the feds stepping in and offering FDIC insurance and things like that. It stabilized it. But more recently, we saw elements of it in the financial crisis, and now we're kind of seeing it again. I want to switch topics just a bit here. You know, the other big thing that was under scrutiny was the Fed's interest rate. Policy. And obviously at the time that the banks were in crisis, especially over that first weekend, the Fed was planning, many people thought, to raise the interest rate by another 50 basis points, as many people have noted, including you, Justin and Zack. Those high interest rate raises over a short period of time caused the duration problems in banks. And so people began to debate, Is the Fed going to lower rates? Should they? Is this going to pop the economy and lead to a decline in inflation? There was this big, big debate about Fed policy. The Fed came out and ended up not going 50 basis points, but 25 basis points. But that was more than a lot of people thought it would be. They thought maybe it would stick at zero or even decline because the Fed would be worried about a liquidity crisis. Justin, maybe I'll start with you, but we'd love to get your perspective as well. Zack was 25. The right numbers, the Fed pursuing the right policy right now.
Justin Speer: You know, my opinion know, I think they wanted to send a message that they remain vigilant in combating inflation and are confident that they can confine and contain the damage from the banking failures. I think that they have done nothing after just a couple of weeks saying they intimating 50. If they'd done nothing, I think that would have maybe inspired a little bit more fear. So the market expects however, you know, the Fed has their plots. It's interesting that the market expects that there's a high degree of likelihood that the Fed is going to need to cut rates fairly dramatically by the end of the year. The Fed swaps suggests the market believes this banking crisis may potentially spill into the broader economy. So I think that's a little bit of a debate that we all need to wrestle with. But from my perspective, at sovereigns prior to this crisis really coming to light, we've been on the opinion that the Fed has already done more than enough to snuff out inflation, and we've been hoping that they would cease hiking rates. We've yet to see the full impact from the actions They've already taken a dramatic increase in the Fed funds rate. We've seen M2 actually contract in December, money supply, broader money supply contracted for the first time in at least 60 years. And it takes time for that to ripple through the economy, 12 to 24 months for monetary policy to really ripple through. And now this banking pressure is a symptom of those measures and will likely result in further slowing in the broader economy in the coming quarter. So we're hoping that they pause here because we're of the opinion that even before thinking about the banking pressures that we've seen, the by the third or fourth quarter, we're going to see a marked deceleration in inflation and potentially some pressures in the economy that we're going have to deal with.
Zack Mansfield: Way outside of my sweet spot in terms of expertise. I don't think that my opinion on this is all that much value. I will say, you know, the rate environment with how it affected, you know, the venture debt world, Right. So, you know, Silicon Valley Bank ourselves, a bunch of others that are involved in this, you know, a couple of different ways this affected it. Number one, and this is also maybe not as well understood point. It relates to the deposit profile. Any company that had commercial venture debt with Silicon Valley Bank or any of the others, part of the loan agreement was you needed to maintain your primary and banking relationship with the debt provider. And so the reason that most of these companies had all of their deposits with SVB or with us or whomever was because they had a loan facility, a debt facility that required it, and there was a part of that that wouldn't allow you to have this diversification of deposits. And so a lot of those companies had all their deposits with SVB. And then for the longest period of time when rates were effectively zero or very low, no one really cared what their deposits were doing, right? There was no yield to be had. And yet over the last year, as rates have risen so rapidly, we started to get a lot of calls from folks are. Hold on, wait a second, what are my deposits doing for me? And there is this kind of like risk on mentality a little bit with their deposits around, you know, Well, actually, if I can get 4% of my money, like if I have $10 million in the bank or $20 billion because I just raised a big venture round that's actually, you know, real money that could pay for another developer to or that could pay for some projects that we want to run. And so you started to see this sort of mentality and psychology that flowed down even into the operating companies. And then all of a sudden that mindset has completely shifted where no one cares at all what yield they're getting. All they want to know is that the deposits are safe. And it really goes back to this broader question of like, how will this impact I mean, credit, definitely this is not a credit issue, but it definitely has tightened credit significantly. Right. And so there's all sorts of psychological effects of these unrelated things which all play into this macro story, which I think I agree with what you guys said. It takes a really long time for that stuff to fully play out. And so the policy is going to be the policy and they're going to make the decisions, but it's going to take a while to figure out how these sort of unrelated and yet interconnected things are all going to work together in the economy.
John Coleman: So I want to ask one kind of quick question about where we are in the future, and then I want to switch to a couple of spiritual topics, if we could, given we're on the FDI podcast. A simple question and maybe start with you, Zack. Is our banking system fragile and what have we learned here that we can do to improve our banking system moving forward?
Zack Mansfield: I think it's the overarching sort of view is that the banking system is not fragile in the sense of I think people's deposits are safe the way in which, you know, the reactions came and the magnitude and the manner in which the Fed and lawmakers and just everyone involved stepped in, It is very clear. We want everyone to know that the banking system is going to exist. We're going to step in to protect it. So I think in that sense, it's secure in all of the senses that we've talked about, about there are parts of it that are related to technology or the interconnectedness or the ways that there are a lot of ways that they are ultimately secure and yet very fragile. Right. And that there's ways that people are going to have to look at the regulation. They're going to have to look at what are the rules that we put in place to help make sure that we don't have to come in and do this kind of like emergency stability. And we can just have an operating sort of structure that's safe for everyone.
John Coleman: Yeah. Justin, any thoughts?
Justin Speer: I just add that, you know, this is a cyclical business, it's a cyclical industry. And maybe start just offering a little perspective for why regulators and industry participants moved as they have. And it is encouraging that they have done as they've done. But in a recent academic research report on the subject that was published in mid-March, there were at least a couple of hundred banks that were seen as having potential for serious contagion risk due to unrealized losses in the asset portion of their balance sheets and the high exposure to uninsured deposits on the liability side. So before the Fed and the FDIC and others stepped in, as they did to help restore some measure of confidence for depositors, it was likely that these roughly 200 at risk institutions, if they would have witnessed half of their uninsured deposits, the part that they were withdrawn, they would have been taken over by the FDIC. Very high likelihood in a truly extreme scenario. Just to give you a sensitivity here, if there were such a panic that 100% of uninsured deposits bled all 4800 banks in the United States, nearly 1600 banks would have gone bust. And so there is a system of confidence and trust that needs to be instilled in the marketplace. I do think the measures taken by the FDIC and the Fed have been really good at ring fencing this thing. But there's just been this race to determine which bank several largest uninsured deposit base is the degree of unrealized losses on the asset side of the balance sheets. I think that race is starting to calm down now that the deposits seem to be more secure, but it was a pretty big problem. So if you think about the weeks following the seizures, we have about 5% reduction in withdrawals for all banks. And that's something that we're certainly going to want to continue to monitor. Feel like that fever pitch is gone, as I mentioned earlier. But as we kind of zero in on this thing, the small and medium sized banks in particular are under a microscope. There are several headwinds for mid-sized banks. The uncertainty about their deposits in deposit costs, declining asset values due to higher rates. And and really important and new is the impact of regulatory headwinds that are likely to be on the horizon. And then lastly, if there's any economic damage that results from this, then we'll be forced to really turn our attention to the performance of bank loans. So we're not out of the woods. The banking system fragile. I actually think it's done pretty well in refinancing this thing around the woods now, but it's certainly cyclical. And John, you harken back to 100 years ago. I think I've seen some interesting corollaries with the SNL crisis, gas and oil crisis from the eighties to the early nineties. So about 3000 institutions that buckled from the fire in interest rates. I'm betting that the moves that we've seen may hopefully can find that to a much smaller number by maybe invited to what we've just seen. That would be great news, I think so. I think our banking system has learned and hopefully will continue to learn from past mistakes.
John Coleman: One more quick question, guys, and then I'm going to ask you a question we always close with on the FDI podcast, which is to just share something you're learning from God through Scripture right now that might be relevant to others. Before we do that, just any thoughts on how Christians should be thinking about this crisis and continuing to create a more redemptive financial ecosystem over time? And Zack, maybe start with you, if you don't mind.
Zack Mansfield: Yeah, I mean, obviously I've been reflect a lot on that over the last couple of weeks and I think it's in line a little bit with what I said earlier, which is there is an element of all of this which points to the fact that, you know, everything in this world will ultimately go away and you know, you're going to die. Some everyone's going to die some day and you can't take everything with you. And, you know, there's an element of like, you know, like I lost assets, right? Like, I had stock that's not worth anything today. Right. And it's a blow, right, when something like that happens. We had folks who were really scared and it just causes you to sort of realize that hope in material things is ultimately a dead hope. And so where do you go after that? And so, you know, the financial system and, you know, all the ways that, you know, we kind of sort of connect and, you know, in sort of a financial sense are ultimately good things. They lead to flourishing. They lead to things like credit. And banking also is good, and yet it's not ultimate. And so that's like a takeaway is that you can't put hope in things that are not ultimate. And yet we should try to work to make them the best that they can be.
John Coleman: That's awesome. Justin, any thoughts on just how Christians should be interpreting this moment?
Justin Speer: Well, you know, because we think about is like, you know, how do you handle these tough times? You know, there's there's many passages where God's telling his people, Don't be afraid, I'm with you Psalm 27 one and the Lord is my light and my salvation whom shall I fear the Lord is the strength of my life? Of whom shall I be afraid? I know I often forget these things when the going gets tough, you know, but scattered throughout God's Word are these exhortations from them to just be at peace. And it's truly one of the great blessings, the great promises from God. I will be with you, Jesus said that I will be with you always. So the challenge for me is really making sure that I'm with God. He's with me. But am I with him? Is he a part of my walk? Part of my thoughts? Is he in my mind when I speak and when I do things? And so sometimes I notice for me personally, my struggle when I am in the middle of the storm or sometimes even with life, a steady I lose that focus. I lose the focus on my king and the king and glory. The king peace. And I lean on my own flesh, lean on my own understanding without even really considering the one who can handle every situation perfectly. And so as I think about this, I know that I really can live my life confidently and without fear. Certainly, you know, we're going to face challenges. And there's really no detailed roadmap for my future. But we have an in-depth strategic planning guide called the Bible. And for every occasion, it works. I have his word and he tells me to trust in him. Trust in the Lord with all your heart. Lean not on your own understanding in all your ways. Acknowledge Him and he will direct your paths. Proverbs Chapter three. So I think knowing this, these things really gives me the ability to face this uncertain future, because I really know that God is with me and he's the one directing my paths and that peace that God offers. That really is a true blessing for us, and a lot of us fail to reach for it. But it's there if we'll have it.
John Coleman: Amen. You know what? Those are two great answers to end on today, I think, actually. Justin, thank you so much for your commentary. Zack, obviously right in the midst of the storm, just so grateful for you taking the time to talk to us and the maturity and perspective that you've brought to this. And I know that our listeners will be super grateful to you all for helping them interpret this crisis and think about the system moving forward. And also just think about what it means to process uncertainty as a Christian and as a person of faith. So thank you both for coming on the show today and hope to have you back very soon.
Justin Speer: Thank you.
Zack Mansfield: It's a joy. Thank you.