SVB and FDIC
Recent market headlines have been dominated by the collapse of Silicon Valley Bank, followed by Signature bank, with additional bank weakness being brought to light. Below is a summary of the situation, a few thoughts, and links for further insight.
Bank review
As we all know, banks serve an important role in our financial system. Banks help us transact easily and provide capital for anything from a car purchase to a business venture. The money we deposit at a bank is not sitting idle, it is being used to provide funding to borrowers or being invested. Banks have capital requirements designed to make sure they are able to provide money used for the everyday fund flows in and out of the bank. Those reserves should be sufficient for daily operation so long as a “bank run” (depositors pull money out of the bank due to concerns about the bank) doesn’t occur, which is what happened to SVB. SVB’s assets were seized by regulators on March 10th and Signature Bank of New York was taken over by regulators a couple of days later.
What happened?
Depositors at SVB started to become concerned about the bank’s ability to provide liquidity and therefore the ability access their funds. SVB had purchased a lot of treasury securities (government-issued bonds) at very low interest rates. With interest rates rising rapidly over the last year, the value of those bonds decreased. Of course, if SVB were able to hold the bonds until maturity their capital would be returned plus and they would have received any interest earned, however, they were forced to sell the bonds and realize losses to meet withdrawals. It is clear that SVB did a poor job of managing their risk in order to try and squeeze out a little extra return.
Rising rates
Over the course of the last year, the federal funds rate rose from essentially 0% to over 4.5%, which is a very steep and quick rise as the Federal Reserve has been working to bring inflation under control. Steep bond losses (which have contributed substantially to the latest weakness in banks) are a result of rising rates (bond interest rates and prices move in opposite directions). The challenge now is that the Federal Reserve doesn’t want to cause a banking crisis or a significant recession, however, the fight to bring inflation under control is still ongoing. In my view, they’ve created this situation for themselves through many years of far too much stimulus (with the government’s help). This system hasn’t been functioning in a healthy manner for many years, yet many people didn’t seem to care because it was “broken” in a way that benefited them with higher asset prices and lower borrowing costs. Now the Federal Reserve is having to confront this reality head-on and returning to “normal” will mean some tough and likely painful decisions, nonetheless, it has to be dealt with.
FDIC
The Federal Deposit Insurance Corporation was designed to maintain stability and confidence in the financial system. To do this, they insure all eligible bank deposits up to $250,000 (more in some cases). For most people, this is enough to provide peace of mind that if their bank did fail, they wouldn’t lose anything, as most people don’t have more than $250,000 deposited in any single bank. SBV was unique in the clientele it served and over 90% of its assets were above the FDIC insurance limit. This caused further concern and contributed to the collapse of SBV. This caused the Treasury, Federal Reserve and FDIC to release a joint statement saying that depositors at SBV and Signature Bank would have access to all their money. They also affirmed their commitment to do everything they can to prevent the issue from spreading by saying “Today we are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system. This step will ensure that the U.S. banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth.” Given this information, it appears there isn’t immediate concern for a widespread banking crisis on the horizon. That said, there will no doubt be economic implications.
To double-check your FDIC insurance coverage, you can use this calculator on the FDIC website.
There are many views of what may happen next, below are links to a few:
If you have questions about how rising interest rates may impact your financial or investment plans, as well as what opportunities you may want to consider, feel free to shoot me an email at advisor@blakegallion.com
