STEPHEN: Its been almost 15 years since we’ve heard much about a bank failure in the news, but that’s what’s taking over the headlines since last week. Thanks for tuning in to another episode of The Smart Money Show. I’m your host, Stephen Rischall, along with my co-host today, Matt Stadelman. By now, you’ve probably heard all about Silicon Valley Bank, and Signature Bank, in the news. The FDIC stepped in, and took control over both these banks in the last few days. Let’s dive right in, and I want to go to you, Matt, what does this actually mean, and why did these banks fail in the first place?
MATT: Well, there are two different stories with Silicon Valley Bank and Signature Bank. But first, it’s important to note that these are two banks whose customers are primarily businesses, rather than consumers like you and me.
For Signature Bank they had a lot of exposure to the crypto currency space. This was, among other factors, what ultimately did them in. Silicon Valley Bank is much larger, and was connected heavily to the venture capital community. That helped SVB grow a lot over the past five years, with their deposit base over-represented by tech companies and startups, funded by venture capital, many with no, or negative, cash flow.
Now last year, the lending market was inactive while rates increased, so instead of borrowing, companies were drawing down deposits at SVB. With a decrease in lending business income, SVB was forced to sell their treasury bonds, and other investments they had planned on holding to maturity, and they did this at a loss.
When they reported the loss on those investments, many of their depositors removed funds from the bank, because they were worried the bank might not be able to make good on those deposits. This led SVB to not being able to meet its reserve requirement, and that’s when the FDIC stepped in to protect depositors.
STEPHEN: I see, so that was really the catalyst for the bank run. A lot of these small companies and these startups, some of them had millions, or tens of millions in accounts at these banks, and they, basically, ran for the door, and now, we have the F-D-I-C taking over both of these banks.
MATT: Yep. And the Fed came out and provided assurances that all depositors will be made whole. Biden also reassured the American people in his speech, as well.
STEPHEN: Yeah, and while a bank failure is, obviously, not a good thing, for the most part, it seems like this has been a rather smooth process, and it’s not like these banks don’t have assets, they do. In fact, it’s sounding more like the depositors are all going to be made 100% whole, with help from the FDIC, and maybe the Fed, if necessary. And I think that’s really important.
MATT: Yeah, and there’s a couple of other things that I think are important. First, the rescue package for S-V-B is only for depositors. Stock and bond holders that held that stock, are being wiped out, which, you know, is exactly what should happen. I mean, they took on the risk of investing in the bank.
Second, the government also shut down Signature Bank, which it’s not clear why they did this, but the joint statement ensured that all depositors of that bank would be treated the same way. The stock and bond holders will also lose in the Signature Bank situation. Third, every depositor had access to their funds starting Monday morning. So the risks of a bank run, have been, sort of, drastically reduced. Now this doesn’t stop customers from going to their regional banks and withdrawing funds, but it will, hopefully, disincentivize them from doing so.
STEPHEN: Right, and I think another thing that’s important to, we should probably mention here, is that the money that’s going to be used to cover deposits, that’s not coming from taxpayers. Instead, it’s going to come from a fund that banks, they pay into, for this type of an emergency situation. It’s, basically, like an insurance program for a banking crisis, and it seems like it’s working as intended, so, again, that’s a good thing.
And sure, there has been some panic. There’s been a lot of panic. We’ve talked with clients that actually have deposits at some of these banks, and other regional banks. With all the negative headlines, and the news stories, it’s really tough to not be at least a little bit concerned. So Matt, how concerned do you think we really should be about all this?
MATT: Yeah, well look, I mean, the circumstances surrounding these two bank failures are somewhat unique. One lesson that can be learned here, just like we say to diversify your investment portfolio, these banks should have done more to diversify their types of, the clients that they work with, so, the types of businesses they work with.
And while it’s shocking news, it doesn’t mean, like, there will be much contagion that spills over into other banks. And since the Fed put a stop in place, if other banks do fail, this lending facility is a good go, is good to go.
STEPHEN: Yeah, and I think we’re definitely going to keep monitoring this situation. We gotta keep an eye in it as it progresses. There’s even more news coming out this morning. I saw interesting fact while I was doing some research on the F-D-I-C website about all of this, I came across a figure that really surprised me. How many bank failures, Matt, do you think happened over the last 10 years?
MATT: Last 10 years? I’m guessing there have been a few, but we just haven’t heard about, I haven’t heard much about them in the news. I don’t know, 20?
STEPHEN: There’s actually been 73 bank failures reported by the FDIC since 2013, and, obviously, we go back to 2009, that’s, you know, the great recession, coming out of that mess, that number increases to 513, huge number.
MATT: So 73 in the last 10 years. I would have never guessed that.
STEPHEN: Yeah, me neither. I was really surprised when I saw that. And look, that’s not to say that these bank failures today aren’t a serious issue, there are issues that definitely need to be addressed, and I feel like they are being addressed, but this just doesn’t seem like its going to spread and lead to mass bank failures across the country.
But if you did have deposits at either of these banks, you do need to take some action, if you haven’t already. If you need assistance, if you have questions, please contact your advisor directly. Call our office. Our team is standing by. We are here to help. Until next time, I’m Stephen Rischall, that’s Matt Stadelman, and this is The Smart Money Show.