In response to the tumultuous month for the banking sector, Randy Mangelsen and John Hockers, co-heads of Investment Analytics at Allspring, discuss the recent bank failings and the risk analysis tools they use to navigate the situation.
Randy Mangelsen: It’s actually quite rare to see a current member of the S&P 500 Index fail. The speed at which both banks collapsed was truly stunning. Truly a wild couple of weeks of headlines, John.
John Hockers: That’s Randy Mangelsen, co-head of Investment Analytics here at Allspring. And I’m John Hockers, also the co-head of Investment Analytics, and you’re listening to On the Trading Desk®. Randy and I have been managing the firm’s Investment Analytics team together for over a decade now and we’ve both been in the investment management industry for about 23 years. Over that time, we’ve been witness to a number of important and sometimes scary events, including the collapse of the dot com bubble back in the early 2000s, the Global Financial Crisis back in 2008, and more recently, the market collapse surrounding COVID-19 in 2020. Randy, thank you for joining me today.
Randy: It’s great to be here, John.
John: All right. Well, this month has been a pretty tumultuous one already for the banking sector with Silicon Valley Bank and Signature Bank both facing solvency issues that required regulator intervention. We’ve also had First Republic Bank and Credit Suisse in the headlines. We thought it might make sense to review some of these events first before we get into a discussion around the tools that Randy and I use to help manage investment risk here at Allspring. So first up, Silicon Valley Bank. SVB, as we’ve been calling it, has the unfortunate distinction of being the first major bank failure in the era of social media and smartphones. A few tweets and a few blog posts really caused depositors to run for the exits in record speed. But the failings at SVB can’t all be blamed on these outsiders pulling money. Really, the bank had a business model that led to a concentration of clients in the tech sector and those clients had very high balances in their accounts, so high that many of them exceeded the $250,000 FDIC insured limit. By some reports, over 90% of the deposits at SVB were above this limit, translating into a very skittish client base when times of trouble occurred. Coupling that skittish client base with long maturity loans and treasury securities, it really created a recipe for disaster when those depositors started to leave. A few days after SVB was taken over by banking regulators, Signature Bank of New York was also shut down. Both SVB and Signature were members of the well-regarded S&P 500 Stock Index.
Randy: It’s actually quite rare to see a current member of the S&P 500 Index fail.
John: Yeah, great point, Randy. Most companies that ultimately fail tend to erode over many months or years, giving those index providers like S&P and other asset managers time to evaluate and mitigate that risk. Here we have two such failures within 48 hours. Really, really amazing, in a bad way, of course, and due to that speed of the collapse, many mutual funds across the investment management industry still held exposure to these two names. And in the case of SVB, many bond portfolios still held debt of that bank as it was an investment grade credit rating when it was shut down.
Randy: Yeah, the speed at which both banks collapsed was truly stunning.
John: So, the week after their collapse brought even more troubling concern. Another California bank, First Republic, needed a large credit line from J.P. Morgan, plus deposit infusions from 11 larger banks to keep it from sinking. And over in Europe, Credit Suisse, a large Swiss bank that has been struggling for a number of years, showed renewed signs of difficulty, which ultimately required their Swiss rival, UBS, to buy them in what I like to call a “take-under”, take-under because the purchase price was significantly under the current market price for Credit Suisse equity.
Randy: Truly a wild couple of weeks of headlines, John.
John: Absolutely. So, Randy, let’s give our audience a peek into some of our risk analysis tools. You know, the ones that I love and the one that’s probably my most favorite right now is Agg Exposures. Can you walk our listeners through how we use that?
Randy: Sure. When a material market event occurs, not just limited to banking issues, the first analytical tool we turn to is our Aggregate Exposure Dashboard. This is an automated tool that can generate a list of all discretionary holdings managed Allspring, along with a variety of key indicative information that allows us to look for particular types of exposures. We can quickly research which portfolios on our platform hold a particular name or a particular type of exposure, a particular sector, or a country, whatever it is that the current stress focuses on. Over the past few weeks, we’ve used this tool to find every penny of exposure that we have to SVB, Signature Bank, Credit Suisse, and any other exposures that we’re looking for as we try to see what the next event in the market is going to be. Knowing which portfolios hold names like this allows us to turn to the second set of tools in our arsenal, which is our benchmark relative risk analysis reports. These risk decompositions let us determine the effects that specific names will have on the overall risk profile of our client portfolios. Getting transparency on specific risks is a proactive and ongoing endeavor for our risk management process, both in times of crisis but also in even more normal market environments.
John: Hey Randy, in a recent write-up that can be found on our website allspringglobal.com, we discussed the importance of gauging the risks involved in transacting with various counterparties, given the liquidity and solvency of some of those counterparties. Can you describe that approach for our listeners, too?
Randy: Absolutely. We believe that a full review of the investment risks must include an assessment of counterparty risks. Allspring has a robust and time-tested process for the approval and ongoing monitoring of broker-dealers used by our traders. The process starts by assigning a Counterparty Quality Rating, or what we call a CQR, to each entity. The CQR scores range from 1, which is the highest quality, to 10, which is the lowest, with most of our approved counterparty scoring in or around the top half of the range between 1 and 5. When a situation is as volatile as we’ve seen recently, we can rapidly reevaluate a counterparty and make the choice to remove it from our approved list, if there’s some adverse news that we need to respond to. In the absence of any material news, however, every counterparty on our list gets approved at least annually to ensure that they’re still meeting our high credit quality standards that we have for all the counterparties that we trade with.
John: Great summary, Randy. Thank you. And in the case of the Silicon Valley Bank, adverse news triggered a review of SVB Securities, their broker-dealer trading arm. And on Thursday, March 9th, we actually suspended trading with them. So, while SVB is still operating, we just felt that it was important to ultimately pause on that until we know the fate of SVB Securities down the road. And of course, we continue to look proactively across all of our counterparties to ensure that our clients’ portfolios are not being adversely affected by any failure of one of those broker-dealers. So, Randy, it looks like we’re getting close to our allotted time limit. But before we go, I’ve got one last question for you. So, on a scale of 1 to 20, with 1 being a lazy day in August and 20 being one of the scariest days back from 2008 in the Global Financial Crisis, how would you rate the last couple of weeks?
Randy: That’s a tough one, John. I think we’re probably at about a 12 right now. I mean, I don’t think the risk is passed, but the rapid response by regulators both in the U.S. and in Europe trying to address the issues feels like it’s moving a lot quicker than it did in the Global Financial Crisis. And I’m hopeful that this can be resolved.
John: Yeah, I would agree. Certainly not a normal market, but nowhere near as crazy as what we lived through back in 2008. And hopefully the next time we’re on the show together, we can maybe have the markets at a nice quiet 2 or 3 and talk about some of the other things that we do on our team. So, Randy, great. Thank you very much for joining me today and really appreciate your time.
Randy: Thank you, John. The pleasure was all mine.
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