Should I Worry About the Banks?

While a full-blown banking crisis is not likely, the recent Silicon Valley Bank failure provides a great opportunity to review your cash management strategy.

Something broke.  

There’s an adage that says the Fed, during tightening cycles, will eventually go too far and “break” something. Over the past year the Fed has been aggressively raising short-term interest rates to bring inflation back towards its goal of 2%. Yet, up until recently nothing had really broken in the system. Plenty of market volatility in both stocks and bonds, for sure, over the past 14 months. But nothing (besides FTX, the beleaguered Crypto exchange, being investigated for fraud) had previously broken.

That all changed on Friday (3/10) when Silicon Valley Bank (“SVB”, the 16th largest bank in the US) "broke" due to a classic run on the bank. By Sunday (3/12), regulators also shut down Signature Bank and announced that all depositors (regardless of account value) of those banks would be made whole by Monday (3/13) in order to prevent a more widespread loss of trust in the US banking system.

These two U.S. bank failures followed on the heels of a 3rd, Silvergate Capital, which had some concentrated bets tied to the Crypto ecosystem. And by Sunday (3/19), to help instill confidence in the European banking system, Swiss regulators brokered a deal where UBS will purchase its beleaguered rival, Credit Suisse, for $3.2B. These events are rightly causing investors and savers to assess their own bank exposures and whether any action is needed. 

What do we know?

SVB, Signature, and Silvergate were somewhat unique banks. Many of their depositors were venture capital (VC) firms and their high-tech start-up companies that were flush with pandemic cash and had deposit accounts measuring in the millions of dollars. SVB invested a chunk of these deposits in long-dated bonds, at a time when yields were at generational lows. As rates began to rise in 2022 and high-tech growth slowed, these depositors started taking withdrawals from their accounts to make payroll and meet other business expenses.

Executives at SVB realized they needed to act to shore up their asset base to meet withdrawal requests by selling some of the bonds (at a $1.8B loss from the price they paid for them) and also announced plans to raise some new capital. Sensing not all was well, the depositors started to pull their money out and transfer it to (presumably) larger, better capitalized banks and also to U.S. Treasuries and money market funds.

The Federal Deposit Insurance Corporation (FDIC) guarantee (per account, per depositor, per bank) of $250,000 doesn’t do much for this sort of depositor, so the regulators decided to guarantee 100% of the deposits (the insured AND the uninsured) to help restore confidence in the banking system, while simultaneously wiping out the stock and bondholders and executive team. U.S. regulators also created the Bank Term Funding Program (BTFP) to serve as an additional backstop for surviving banks by lending cash to them if needed to meet deposit withdrawals without having to sell bonds at losses to meet withdrawals.

What should investors do?

It’s sometimes said that risk is what’s left over after you think you’ve thought of everything else. Risk is always present somewhere in the system, even if we can’t identify it. Nobody (regulators, Wall Street analysts, investors, depositors, company management) predicted the SVB situation in advance. A bank run was not on anybody’s radar as potential risks for 2023. Yet it happened seemingly in plain sight and with lightning speed.

And so the SVB situation serves as a good reminder to continually assess our risks and exposures, which now also includes cash savings in banks. We recommend that our clients check their bank accounts to see if any exceed the $250,000 FDIC limit per bank per person per account, and if so, consider spreading some of the excess to other banks or Fidelity or Schwab.

Over the past several months we’ve been moving and diversifying excess cash in your accounts to Schwab and Fidelity money market funds, which have greater investor protections under SIPC (and “excess of SIPC”) protection and higher yields. SIPC covers up to $500,000 per brokerage account, including up to $250,000 in cash balances. Both Schwab and Fidelity provide additional “excess of SIPC” coverage that kicks in above $500,000 with no per customer dollar limit on coverage of securities such as money market funds, stocks, bonds, ETFs, and mutual funds (up to $1B in aggregate coverage at Fidelity for example). The SIPC-protected money market funds we’ve been using for clients also come with attractive yields of around 4.5% of late as compared with Wells Fargo’s Platinum Savings yield of 1.98% (as of 3/21/23).

Markets may remain volatile for a while as investors and regulators continue to assess the health of the banking system and any ripple effects that may occur. This is not the first bank failure, nor will it be the last, but for long-term investors the strategy remains the same: ride out the turbulence and remain diversified, stay focused on your goals, and control what you can control, which not only includes your emotions and behaviors, but also your cash management strategy.

Please reach out to us if you’d like to discuss your specific situation in greater detail.

Thanks for reading.

- Mike