By now you may have heard that late last week and yesterday there were 2 sizable bank failures in the United States. Reactions have varied from serious concern to no concern. I just wanted to reach out and lend some perspective on what happened and what that could mean for our clients.
First, what happened? Simplified, Silicon Valley Bank (SVB) based in California, found itself in the midst of depositors who wanted to get their money out. Most of that was not protected by the $250,000 limit given through the FDIC because account values were well in excess of that. Banks typically don’t have all that much cash (relative to deposits) available to handle widespread redemptions.
They did have a lot in various treasury securities. Those are liquid and can be easily sold. Unfortunately, their treasury securities were worth much less than they paid for them thanks to the rising interest rates we’ve seen in the last 1 ½ years. Selling those treasuries wouldn’t give them enough money to pay off the depositors who wanted out.
This could be a problem for other banks, since undoubtedly many have treasuries that are worth less than the banks paid for them. It may only become an issue if depositors decide en masse to pull money from banks. I don’t think they will if they are smart, but many with accounts far in excess of the $250,000 FDIC insurance could decide to spread those accounts to multiple banks and that could cause more bank runs.
In hindsight, the Friday timing of the SVB failure was probably fortuitous; it gave the Treasury Department the weekend to line up a stabilization plan with global markets closed. Officials worked feverishly behind the scenes and briefed leaders and rank-and-file members of Congress.
They unrolled emergency measures Sunday evening that will guarantee deposits of SVB’s customers. Regulators also closed Signature Bank, another institution that was threatening to collapse, and ensured its customers would get a similar deal. US taxpayers will not finance either move, officials said.
(Guaranteeing the deposits was a key aspect; the sweeping moves Sunday evening from Treasury Secretary Janet Yellen, Federal Reserve Chair Jerome Powell and Federal Deposit Insurance Corporation Chairman Martin J. Gruenberg were designed to prevent panicked investors from withdrawing funds from other banks, thereby threatening their survival, and also to allow firms with large deposits to make payroll and ensure their viability. It was needed to keep large depositors – those with accounts far over the $250,000 FDIC limit – from pulling those funds from weak banks and creating more bank runs.)
So now what? If the Federal Reserve keeps raising interest rates to fight inflation, the bonds held by banks will continue to lose value. Many of these banks will be fine if they can hold the bonds to maturity and collect full face value. It is when they are forced to sell them at current (lower) value to meet redemption requests that they get into trouble. My opinion is that the Fed will slow or stop raising interest rates so this problem won’t get worse. That could mean inflation will continue to get worse, but that seems to be a better solution than letting the banking system collapse!
I believe this could lead us into more of a recession, but if that happens inflation should recede some. Early last year I communicated to clients we could see a further drop in the stock market and that happened through early October. The rally since then has been nice but it may not last. This should not worry long term investors; those who have short-term cash concerns should call us for a quick review on best course of action.
We’ve seen troubling times before – I’ve witnessed quite a few in my career. Keeping perspective is always important. The last big drop in the stock market was in 2007-2009. The S&P500 is now about 470% higher than it was in March 2009. So while the near term is certainly cloudy, long-term the markets tend historically to move higher.
Feel free to call us with any questions. As always, thank you for your past business – we hope to continue earning it in the future