Banking Industry Uncertainty

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The recent news about the banking industry is an unpleasant reminder of the Great Recession of 2008. In the past week, both Silicon Valley Bank (SIVB) and New York-based Signature Bank (SBNY) were shut down by regulators. According to a joint statement issued by the Federal Reserve, Treasury, and Federal Deposit Insurance Corp. (FDIC), all depositors (even those over FDIC limits) will be paid back in full.

The last major U.S. banking failure was that of Washington Mutual in 2008. However, it is important to note that we are in a different environment than we were during the Great Recession. In the three months leading up to the Washington Mutual bank failure, the economy lost over a million jobs. In the three months leading up to the Silicon Valley Bank and Signature Bank failures, the economy has added over a million jobs.[i]

SIVB apparently invested about $21 billion or 10% of its assets in long-term bonds, which were not paying very high interest rates – about 1.79% on average last year.[ii] However, as Fed policy drove up interest rates, new bond rates also rose, driving the value of older long-term bonds lower. At the same time, many of the customers of SIVB suddenly experienced shortfalls and were simultaneously drawing down on funds held at the bank. SIVB was unique in the banking industry, as they lent to an exclusive group of tech startups, venture-backed healthcare, and cryptocurrency related companies.

Thankfully, your investment is the opposite of putting all your eggs in one basket. We employ broad diversification on the equity side, paired with high-quality bond holdings.  Similar to the market of 2022, diversification works to reduce the volatility inside your portfolio to protect you when the market dips, but still capture market returns during period of recovery.

While there is uncertainty in the stock market due to the banking industry, you may have noticed that indexes like the S&P 500 were up. That is because there is speculation that current developments may cause the Federal Open Market Committee (FOMC) to slow the pace at which they plan to raise future interest rates.  The next Fed meeting and announcement is due March 22nd. A slower pace of interest rate increases would be generally positive news for the stock market.

The popular banking institution Flourish, used by some of our clients, was able to successfully transfer all client funds out of Signature Bank this week and all clients continue to have full access to their funds. Banking custodian Charles Schwab, has experienced stock price volatility related to uncertainty in the market. However, Schwab is in a very different position than Silicon Valley Bank, with effective, disciplined risk management practices. Schwab has a broad base of high-quality customers across multiple lines of business, capital well in excess of regulatory requirements, and a high quality and relatively small loan book. As an example, Schwab had $41.7 billion in new assets in February (second strongest February on record), as well as continued momentum in March with daily net new assets of over $2 billion per trading day. Recent banks in the news had 2% to 20% of their deposits insured.  Schwab, on the other hand, has more than 80% of client cash insured by the FDIC. Investments at Schwab are held in the investors’ names and are separate (not comingled) with assets at Schwab’s Bank. Further, Schwab does not have any direct business relationships with Silicon Valley Bank or Signature Bank, so they do not have any exposure to direct credit risk.[iii]  

As fiduciaries, we are always putting your best interests first.  Kondo Wealth Advisors is an independent advisory firm and we are not employees of any financial institution.  If we feel any alarm, we will alert you timely. Should you have any questions or concerns, please reach out to us and we’d be glad to connect.

[i] Perspectives on the Silicon Valley Bank and Signature Bank Failures
[ii] Bob Veres: SVB on the Run
[iii] Perspective on recent industry events | About Schwab

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