The answer is very little and a whole lot.

It depends. I’ll explain.

Here’s what we know about the sequence of events that led to the collapse of Silicon Valley Bank, a bank with $209 billion in assets as of the end of December. (As of 2022 year-end, Silicon Valley Bank had seen assets balloon so that the bank had become the `16th largest in the United States. The Trump administration rolled back regulation on banks with less than $250 billion in assets in 2018, arguing that banks below that size were not systemically important to the U.S. financial system. Silicon Valley Bank lobbied hard for the looser regulation.) This is the second-largest bank failure in U.S. history after the 2008 failure of Washington Mutual and the second bank failure since 2020.

1. Cash, lots of cash flows into Silicon Valley Bank, THE bank for tech companies and startups in 2021, during the huge boom in the technology sector. U.S. venture capital-backed companies raised $330 billion in 2021, almost doubling the previous record a year before from the year before. In the 12 months to March 2021, the bank’s total deposits exploded higher to about $124 billion from $62 billion, according to Bloomberg. That 100% surge far outpaced a 24% increase at JPMorgan Chase & Co. and a 36.5% jump at First Republic Bank, another California institution.

2. The bank invests much of that money in U.S. Treasuries. In essence, cash flows into the bank so quickly that the bank can’t find loans to soak up the dollars. Silicon Valley Bank’s loan-to-deposit ratio falls to 43%.

3. The Federal Reserve raises rates. The Federal Reserve raised interest rates 7 times in 2022 and then again on February 1, 2023. The benchmark short-term Fed Funds rate goes to a range of 4.50% to 4.75%. On Mech 16, 2020, the Fed Funds rate had been 0% to 0.25%. With each increase in interest rates, the Treasury bonds in Silicon Valley Bank’s portfolio are worth less. But under the rules of bank accounting–hey, I agree that this is a stupid rule–the bank is not required to mark down the value of its portfolio until it sells the bonds. Mark-to-market losses exceeded $15 billion at the end of 2022 for securities held to maturity, almost equivalent to the bank’s entire equity base of $16.2 billion. Moody’s Investors Service had informed the bank the previous week that the size of the mark-to-market losses meant the bank was facing a credit rating downgrade or one or two grades.

3. Some Silicon Valley Bank clients face a cash crunch. Two reasons (or maybe three depending on how you count these points.) First, the global economy slows depressing revenue for many technology companies. Second, the global supply chain is severely disrupted by the Covid pandemic meaning some companies have less stuff to use to make the stuff they sell. Third, the interest rate increases from the Fed lock some companies out of the IPO (initial public offering) market, and raising money at a decent valuation in the private venture capital market gets more difficult.

4. Some of the bank’s Silicon Valley customers withdraw deposits to fund their business operations. Which leads to a cash crunch at Silicon Valley Bank. To fund withdrawals, on Wednesday Silicon Valley Bank sold a $21 billion bond portfolio consisting mostly of U.S. Treasuries. The portfolio was yielding an average of 1.79%, far below the current 10-year Treasury yield of about 3.9% so you can imagine that these bonds were trading at a substantially reduced price. The sale forced Silicon Valley Bank to recognize a $1.8 billion loss.

5. On Thursday Silicon Valley Bank announces that it will sell $2.25 billion in common stock and preferred convertible stock to fill its funding hole. The bank makes a major timing error–by including the preferred stock in the sale, the offering takes longer to close. Which gives the market time to worry and companies in Silicon Valley time to consider withdrawals.

6. It might have all still been okay if the Silicon venture capital community and the entrepreneurs who run companies with funds at the bank agreed to stand together and in effect give the bank a vote of confidence.

7. But many venture capital firms, such as Peter Thiel’s Founders Fund, advised their portfolio companies to withdraw their money from the bank. Here’s where Silicon Valley Bank’s very concentrated customer base hit the company hard. Very little of the bank’s deposit base came from retail depositors insured against losses by the Federal Deposit Insurance Corporation. Most–93% as of December–were business deposits in accounts that exceeded the $250,000 FDIC insurance cap. These accounts were essentially uninsured.

8. With the bank now hemorrhaging deposits, the investors, such as General Atlantic, that Silicon Valley Bank had lined up for the stock sale pulled out and the effort to raise capital collapsed late on Thursday.

9. On Friday Silicon Valley Bank scrambles to find alternative funding but the effort fails and later in the day, the Federal Deposit Insurance Corporation announced that it was shutting down the bank and placing it in receivership. The FDIC added that it would seek to sell SVB’s assets and that future payments may be made to uninsured depositors depending on the terms of the sale. On Sunday, the FDIC, the Treasury, and the Fed agree on a plan to guarantee deposits above the $250,000 FDIC cap.

You can see how this sequence of events lends some credence to the theory that the collapse of Silicon Vally Bank was a one-off due to the unusual nature of the bank’s business and deposit base. (That argument faces tougher sledding after New York State banking authorities closed down Signature Bank on Sunday. State officials said the move came “in light of market events, monitoring market trends, and collaborating closely with other state and federal regulators” to protect consumers and the financial system. Federal officials have said they will act to make Signature depositors whole as well.)

Silicon Valley Bank did have a very concentrated customer base that made the bank vulnerable to a downturn in a single sector (and in its venture capital sources.) The bank was especially exposed to the risks posed by the Federal Reserve’s rapid interest rate increase because of the huge funding bubble in the technology sector (partially created by the Fed, let’s note) led the bank to buy lots and lots of Treasuries as deposit growth outstripped loan demand.

And the bank did exhibit a self-congratulatory over-confidence that seems to be a common feature at the top of the technology cycle in Silicon Valley. Everyone knows technology is subject to big cyclical swings, but everybody seems to forget the historical evidence at the top of the cycle. (This isn’t an attitude confined to Silicon Valley and its investors, of course.)

If you take the “one-off” view, the effects of the collapse of the bank are still by no means insignificant.

Even with the latest government plan to make depositors whole above the $250,000 FDIC insurance cap, the collapse of the bank is likely to make raising money harder for Silicon Valley technology startups. And valuations in private rounds of funding, which have been falling lately anyway, are likely to continue to retreat. And going public will take more time. Some early-stage technology companies will run out of cash before they hit profitability or an IPO. Venture capital investors are likely to look to find alternative exits with any delay to the IPO schedule. Which will lead to more alternative exits via private equity deals or buyouts by older and larger technology companies. The next few quarters will be a good time to be a big tech company looking to acquire promising new technology.

But a “one-off” view certainly argues that the collapse of Silicon Valley Bank doesn’t pose a systemic risk to the U.S. financial system.

And that’s true if you define systemic risk by looking back at the subprime mortgage crisis. That “event” became such a big deal for the financial markets because so many assets were “guaranteed” by third parties. The market couldn’t tell what investors, beyond the originating institution, were actually holding the bag or how bit the bag might be. The Federal Reserve stepped in as lender of last resort because the contagion of the crisis threatened to spread to so many interlinked institutions.

That’s not the case here. Silicon Valley didn’t sell financial paper to other investors who now face a risk of collapse. The collapse of the bank is a big deal to the companies that were its customers and depositors but not to other financial institutions that bought assets backed by Silicon Valley Bank deals sold by the bank.

But it should already be clear that the “one-off” view is wrong. If there wasn’t systemic risk to the U.S. banking system from the collapse of the bank, then the FDIC, the U.S. Treasury, and the Federal Reserve wouldn’t have invoked the “systemic risk” rule in the FDIC regulations to make all depositors at Silicon Valley Bank whole.

The problem this time isn’t contagion among financial institutions that bought risky financial deals from each other while arguing that they were risky because they were “guaranteed” by some third party. The problem this time is that the source of possible contagion is the Federal Reserve itself.

By keeping interest rates so low for so long–remember the Fed’s benchmark short-term interest rate was essentially 0% in March 2020–and expanding its balance sheet so massively–the Federal Reserve presided over a banking system that was stuffed with “safe” Treasuries with very low yields.

And then in 2022 the Fed suddenly woke up to the problem with four 75 basis point interest rate increases in a row and a total of seven interest rate increases in a year. The February 1, 2023, 25 basis point rate increase took the Fed’s benchmark up to a range of 4.50% to 4.75%.

You think Silicon Valley Bank–and Signature Bank in New York–are the only banks with bond portfolios that are substantially underwater? And that haven’t yet been marked to market?

In a February 23 speech FDIC chair Martin Gruenberg put unrealized losses on available–for–sale and held–to–maturity securities at banks in the FDIC universe came to $620 billion.

The Federal Reserve is clearly worried by the potential of mark-to-losses to generate a wave of runs and failures in the U.S. banking system. Look at how the plan by the Fed, the FDIC, and the Treasury to control the Silicon Valley “problem” is structured. Banks will be able to borrow from a new $25 billion program using Treasuries as collateral. Bur that collateral won’t be marked to market. The collateral will instead be valued at whatever the bank’s portfolio says it’s worth.

You don’t do it this way unless you see a good chance of a mark-to-market bank crisis.

From this perspective, the potential effects on your portfolio are substantial.

Banks with decently sized depositor bases will look to raise cash by increasing incentives for retail customers to put money into their banks. I’d expect to see an increase in the yields offered by banks on certificates of deposit (CD) and money market funds. Watch for deals with higher yields.

The effect on the Treasury market is likely to be complicated as potential buyers try to calculate the trade-off of rewards with higher risk. I think this means more buying–and lower yields possible at the shorter end of maturities. A 6-month Treasury yielding 4.95% seems very attractive since holding to maturity isn’t all that hard. Don’t know if this is a trend yet but the yield on the 6-month Treasury fell to 4.95% on Friday, March 10 from 5.51% on Thursday, March 9.

Demand for 10-year Treasuries? Higher because they’re safe? When maybe they’re not. Lower because banks will want to shorten the maturities of their Treasury portfolios?

The trend at the longer end of the Treasury market–and those for interest rates across the economy as a whole–will depend in large part on how the Silicon Valley Bank collapse and the mark-to-market crisis affect the Federal Reserve’s interest rate policy. Already Wall Street powers such as Goldman Sachs are downgrading the odds of a 50 basis point increase at the March 22 meeting. Other Wall Street strategists and economists are going further and arguing that the Fed now won’t raise rates at all. My opinion is that the Fed pretty much has to raise rates by at least 25 basis points or wave goodbye to its inflation-fighting efforts. And send a strong message to the financial markets that investors and banks are looking at a major, really scary, financial crisis. That wouldn’t help the market avoid a crisis, now would it?

How would the stock market react to a less aggressive Fed on interest rates? Not positively, in my opinion, since the change in Fed policy would leave inflation rates intact with a financial system that is much more risky and an economy that is likely to grow more slowly for all the wrong reasons. And uncertainty about technology shares would hang over the overall market since no one could be sure where the next financing problem might crop up.

More on this, I’m certain, as the day advances on Monday.