Wednesday, March 15th, 2023
It’s difficult, and often counterproductive to comment about breaking news while it’s still moving through the proverbial grinder. Which is why we usually don’t do so. However, we feel it’s worth commenting on the current, growing number of regional bank runs.
Before taking a look at the details, we’ll lead with two larger assurances:
Your Accounts Are Safe With Us
We custody all clients’ accounts at Schwab and TD Ameritrade. This means the investments and securities held in those accounts belong to our clients, not the custodian or a bank. This is like having the equivalent of a safe deposit box for your investment portfolio.
The recent situations affecting some regional banks is not the same for all banks. If you have let us know about deposits at an affected bank, we are following up with you directly to help navigate your next best steps. If you have holdings we aren’t yet aware of, please let us know, so we can help you accordingly.
Even if your money remains safe and sound, we are available to speak with you about any questions or concerns you have at this time. This is one of the biggest reasons you hired us: to serve as an informed sounding board during confusing times.
Our Advice Remains the Same
As you know, we typically seek to optimize your personal long-term outcomes by recommending against reacting to near-term upsets. This philosophy is based on our own and others’ best thinking about how to improve your odds for investment success over time. As such, our strategy already expects that the unexpected WILL happen now and then. To a point, the stress of realized risks can even contribute to our expected returns.
What Led Up To The Recent Bank Failures?
As usual, there are a number of smoking guns but there are some key differences as to what got Silicon Valley Bank (SVB) and Signature Bank to this point of failure. For one, Signature Bank had a lot of exposure to the crypto currency space and many of those clients and investments soured. Silicon Valley Bank was more than twice the size and their client base was mostly concentrated in tech startups and venture capital. The commonality here is that most all of their clients are businesses, not personal retail clients.
In the case of SVB, for example, its tech-heavy clientele deposited large amounts of cash during the pandemic when the industry was awash in undeployed assets. In turn, the bank used the money to buy Treasury and other bonds. As interest rates rose, prices for SVB’s bond holdings fell. Perhaps the biggest hit comes from banks holding exceptionally large reserves of low-yielding bonds in today’s higher interest rate environment which has changed rapidly over the past year.
Normally, this wouldn’t be a problem; whether you’re a bank or an individual investor, as long as you simply hold low-yielding bonds to maturity, you can expect to be made whole at the end. But if too many of a bank’s customers pull out their money all at once, the bank may be forced to sell their low-yielding bonds at a loss, to meet the sudden demand for cash. These sorts of bank runs can spin out of control.
What’s Going To Happen Next?
We are in the midst of all this and it would be impossible for anyone to predict the outcome. That said, here are our observations so far.
To date, it would appear that the most at-risk banks are those that are:
• Serving clients in cash-heavy industries, such as technology, cryptocurrency, venture capital, and private credit; and
• Perhaps more significantly, holding large percentages of uninsured deposits
To expand on that second point, today (versus during the Great Depression’s bank runs), the FDIC insures up to $250,000 of each bank customer’s deposits. If you’re married, each of you receive protection of up to $500,000 on a joint account. If an account exceeds FDIC limits, the excess is uninsured. In the case of SVB at year-end 2022, its deposits were valued at around $200 billion, but only about $30 billion of those deposits were insured. That translates to a lot of big accounts with uninsured balances.
As we might expect, the government is not sitting idle as events unfold. It’s “all hands on deck,” with rapid-fire announcements coming out of the Treasury Department, the Federal Reserve, and the FDIC.
• To address the immediate issue, these Federal institutions are taking a number of joint emergency actions to protect affected account holders, in some cases promising to protect even those whose accounts exceed FDIC insurance levels.
• There is also talk of slowing or stopping with rate hikes at the next Federal Reserve meeting, to help stabilize banks’ bond reserves in general. Time will tell if this becomes fact.
• Discussion is underway on how to shore up any systemic concerns over time. For example, there’s already calls for re-tightening banking controls such as capital requirements and liquidity rules for small- and mid-sized banks.
As such, while the news is as noisy as usual when fear is in the air, we are cautiously optimistic a worst-case scenario is avoidable. That’s no guarantee. But if we place today’s news in historical context, the banking system has been under similar and worse strains, and remained resilient.
You and Your Money
In the meantime, there are your own cash reserves and investments. During times of heightened risk, the longing to take hurried action becomes a pull that’s often too strong to overcome on your own. Before taking any immediate steps, we urge you to talk it over with us.
Unfolding events do underscore one action that may be advisable from a “better late than never” perspective. If the cash you hold in any one bank exceeds FDIC protection (or, in the case of brokerage cash accounts, SIPC limits), there may be value in working out a plan for addressing that issue. That said, whether during the Great Depression or today, panic is rarely an advisable way to proceed.