Recent financial market volatility has been widely attributed to a pair of bank closures in the US, which were followed by a spillover into the global banking sector as the shares of Switzerland-based Credit Suisse Group AG sharply sold off. The events have led to speculation that the US Federal Reserve (Fed) may respond in part by easing its campaign to tighten monetary policy.
At Vanguard, we continue to encourage investors to avoid speculation and trading on emotion, and to focus instead on the long term and factors within their control.
Here we provide background on recent events, explain what happens when a security drops from an index and summarise our approach to risk management.
Driven by strong deposit growth, Silicon Valley Bank doubled in size in 2021 and primarily invested those deposits in longer-duration US Treasuries and mortgage-backed securities. As interest rates climbed, the securities fell in value, and the bank was forced to sell some at lower prices amid customer withdrawals.
Loss-making investment sales triggered more withdrawals by clients of the bank, which catered to technology start-ups and venture-capital firms. Silicon Valley Bank announced sizable losses on 8 March, and its shares subsequently declined rapidly. On 10 March, regulators halted trading in shares of SVB Financial Group, the bank’s parent company, and closed the bank to protect depositors.
On 12 March, New York-based Signature Bank was also shut down by regulators and placed into receivership by the Federal Deposit Insurance Corporation (FDIC). The FDIC has approval to complete its resolution of Silicon Valley Bank and Signature Bank in a manner that fully protects all depositors, both insured and uninsured.
On 15 March, concerns spread to Europe, prompting the sharp sell-off in the shares of Credit Suisse Group AG, indicating that markets remain wary about further banking-sector developments. Although Credit Suisse’s challenges—which have been public for more than a year—appear unrelated to those of Silicon Valley Bank and Signature Bank, the sell-off highlights the potential for near-term risks in the banking sector.
On behalf of its investors, certain Vanguard funds owned securities issued by both of the shuttered US banks. As at 31 January 2023, the aggregate exposure to SVB Financial Group in Ireland-domiciled Vanguard funds was 0.02% of all such funds’ assets. As at 31 January 2023, the aggregate exposure to Signature Bank in Ireland-domiciled Vanguard funds was 0.01% of all such funds’ assets.
Certain Vanguard funds also own securities issued by Credit Suisse on behalf of Vanguard’s investors. As at 31 January 2023, the aggregate exposure to Credit Suisse Group AG in Ireland-domiciled Vanguard funds was 0.08% of all such funds’ assets.
Index providers such as S&P Dow Jones, FTSE, MSCI and Bloomberg determine the securities in each index or benchmark. S&P, for example, announced the deletion of SVB Financial Group from its indices effective at the close of trading on 14 March.
Index funds and exchange-traded funds (ETFs) seek to track their benchmarks by replicating the risk and/or exposures of those benchmarks in their portfolios. As a result, Vanguard index funds own many securities in line with their benchmark weights. Equity and fixed income index inclusion criteria differ by provider, but once a security no longer meets those criteria, it will fall out of the provider’s index. Securities removed from indices are then removed from Vanguard index funds.
Despite market concerns, we believe that the prospects for contagion in the banking sector are limited and that recent events represent a temporary shock. Recent banking sector events don’t change our economic and market outlooks, and we continue to believe that bringing inflation back to acceptable levels remains the most important factor for major central banks.
All Vanguard funds, whether managed by Vanguard’s internal investment teams or by one of our external advisory firms, are subject to rigorous risk oversight and analysis. Each fund has documented investment objectives and strategies, a benchmark against which its composition and performance are assessed and documentation of permitted instruments and risk limits.
Our risk-management efforts do not preclude losses—investing inherently entails the risk of loss—but they are central to our investment process. Our seasoned risk managers:
Importantly, our risk managers operate independently from our investment managers and analysts, reporting directly to our chief risk officer.
Unexpected and fast-moving economic or financial market news can be disquieting. In most cases, however, Vanguard believes that investors benefit in the long run by sticking with well-considered financial plans and portfolios.
In particular, we believe investors should focus on:
In general, investors should change their portfolios only when there are meaningful shifts in their investment horizons, goals or financial circumstances, and not in response to short-term market conditions or performance.
Investment risk information
The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.
Reference in this document to specific securities should not be construed as a recommendation to buy or sell these securities, but is included for the purposes of illustration only.
ETF shares can be bought or sold only through a broker. Investing in ETFs entails stockbroker commission and a bid- offer spread which should be considered fully before investing.
Funds investing in fixed interest securities carry the risk of default on repayment and erosion of the capital value of your investment and the level of income may fluctuate. Movements in interest rates are likely to affect the capital value of fixed interest securities. Corporate bonds may provide higher yields but as such may carry greater credit risk increasing the risk of default on repayment and erosion of the capital value of your investment. The level of income may fluctuate and movements in interest rates are likely to affect the capital value of bonds.
For professional investors only (as defined under the MiFID II Directive) investing for their own account (including management companies (fund of funds) and professional clients investing on behalf of their discretionary clients). In Switzerland for professional investors only. Not to be distributed to the public.
The information contained in this document is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information in this document does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this document when making any investment decisions.
The information contained in this document is for educational purposes only and is not a recommendation or solicitation to buy or sell investments.
Issued in EEA by Vanguard Group (Ireland) Limited which is regulated in Ireland by the Central Bank of Ireland.
Issued in Switzerland by Vanguard Investments Switzerland GmbH.
Issued by Vanguard Asset Management, Limited which is authorised and regulated in the UK by the Financial Conduct Authority.
© 2023 Vanguard Group (Ireland) Limited. All rights reserved.
© 2023 Vanguard Investments Switzerland GmbH. All rights reserved.
© 2023 Vanguard Asset Management, Limited. All rights reserved.