With all of the recent news regarding the banking system, we thought you may find it helpful to review the following common questions about what has transpired and things to consider moving forward.
What happened?
It started with Silicon Valley Bank (SVB). Due to historically low interest rates (until last year), SVB previously made a decision to hold much of the bank’s checking and savings deposits in long-term bonds in order to earn a higher yield. This is atypical. Most banks hold a majority of their deposits in shorter term investments. SVB customers are also atypical with many depositors keeping large cash balances well beyond the Federal Deposit Insurance Corporation (FDIC) limits. When the Fed started raising interest rates last year, the price of long-term bonds decreased in value and SVB was stuck with an “asset-liability mismatch.” As customers started withdrawing funds, SVB was forced to sell long-term bonds at a significant loss.
Solidifying any potential for shaky ground, the Federal Reserve stepped in guaranteeing all depositors of SVB would be able to access all of their money – even the funds that were above the FDIC insurance level.
Could other banks be at risk?
What we are seeing so far is that banks with a unique client base or atypical structure, such as SVB, are the ones to have gotten into financial trouble. SVB focused on venture capital, startups, and technology. First Republic Bank, another San Francisco based bank, has a similar clientele to SVB, and per the Federal Reserve Board they just received funding to shore up their liquidity. The Fed announced this week that this type of funding will be offered to other eligible banks in order to ensure there is enough liquidity to cover the needs of their customers. Signature Bank, based out of New York, focuses on the cryptocurrency industry, and they also ran into trouble due to the unique nature of their clientele and their decision to buy longer term US government bonds.
Credit Suisse, based out of Switzerland, is thus far the one bank with a global reach that has needed help to shore up their balance sheet. Credit Suisse is also a bit of an outlier in that they have been going through some restructuring and changes for a number of years now. However, the Swiss government stepped up in a significant way to insure the health of Credit Suisse.
Where do we go from here?
Based on the swift actions by the US government and others around the world, we think there is a fairly low amount of risk that these issues will spread to the large US banks. This could all blow over in a couple of months, or there could be other consequences and changes that take place over the next couple of years. In fact, we’re already seeing lenders tightening their standards. These are some of the consequences of the speed at which interest rates have risen over the last year.
Do I need to do anything?
In our view, there is nothing to be alarmed about. Ultimately, if you keep $250,000 or less in cash, you’re good. This is a non-event for you. The unfortunate collapse of SVB, and a few others, was due to very specific circumstances not typical of most large banks. Franklin D. Roosevelt and the 1933 Congress created the FDIC during the Great Depression specifically to protect bank depositors and to ensure trust in the banking system. While the FDIC limit started at just $2,500, it has since increased to $250,000. This means you have nothing to worry about regarding access and stability of your cash up to $250,000 per depositor, per bank.
Are my investments safe?
There are no issues or concerns with investments, investment accounts or access to your investments. The situation is specific to checking and savings deposits. That said, as the stock markets continue to digest new information, could things continue to be volatile? Yes, that is certainly within the realm of possibilities, and that’s why we have a strong safety net in place for retiree income distributions. Additionally, it’s very important in times of uncertainty that we stay the course with our investment strategies and not react to the news. Trying to predict the news or time the markets is futile at best. It will eventually work itself out, and the capital markets will make the necessary adjustments and continue to be a place of growth and prosperity.
