The recent news about the banking industry is an unpleasant reminder of the Great Recession of 2008, and the banking failures of the Great Depression. We all hoped these instable markets of the past were no longer a present day concern, but the persistent negative headlines in the banking industry have brought about concern to the market.
The banking unrest started when Silicon Valley Bank (SIVB) and New York-based Signature Bank (SBNY) were shut down by regulators in mid-March. Silicon Valley Bank was unique in the banking industry, in that they specialized in servicing a concentrated group of clientele: tech startups, venture-backed healthcare companies, and cryptocurrency related companies. Silicon Valley Bank grew with the tech industry, becoming one of the 20 largest lending institutions in the U.S. with $209 billion in assets prior to its collapse in March. However, this concentrated tech-heavy industry felt pressure in 2022, as the Fed raised interest rates and purposefully slowed the economy. This financial shift caused Silicon Valley Bank’s customers to withdraw large sums of cash to support their businesses in a slower revenue environment. At the same time, Silicon Valley Bank sustained large losses on their $21 billion of long-term bond investments. As many of us know, bonds of the recent past were paying an average of 1.79%. In 2022, as the Fed Funds Rate rose every quarter, the old bonds paying less than current market rates, were less desirable or lower in value. As such, when Silicon Valley Bank had to redeem their old bonds at market value to replenish cash reserves and sustain customer withdrawals, the bank realized large losses that eventually led to their downfall. As a last ditch effort, Silicon Valley Bank tried to raise capital by issuing $2.25 billion in new shares to cover their losses, but it was too late. Depositors in panic withdrew all their funds and the bank’s stock price lost 80% of its value in a couple of days.
The Federal Deposit Insurance Corporation (FDIC) guarantees customer deposits up to $250,000 per person, or $500,000 per joint account. That means ordinary bankers who have deposits below these levels were fully insured and not at risk of losing money. Additionally, a joint statement issued by the Federal Reserve, Treasury, and FDIC, assured that all depositors (even those over FDIC limits) would be paid back in full. Silicon Valley Bank had large customers like Roku, who had a reported $487 million in cash deposits, and Roblox, who held a sizable $150 million in deposits at the bank. These coveted relationships made Silicon Valley Bank ideal for acquisition, and First Citizens Bank purchased Silicon Valley Bank in March 2023. The UK arm of the bank is reportedly being sold to HSBC Corporation in London.
However, the bigger fear remains. Is the banking industry crisis systemic? Ripple effects affected many mid-tier banks in the U.S. like Zions Bank in Salt Lake City and First Republic Bank. Uncertainty was put to rest for First Republic when eleven large U.S. banks combined efforts to support the bank with an infusion of $30 billion in new deposits. Overseas, Credit Suisse of Switzerland was purchased by UBS, Switzerland’s largest bank, for $3.25 billion dollars, in an effort to stabilize the banking system and prevent further crisis. Additionally, there is whispering that other banks in similar situations might have hidden their financial losses by re-categorizing short-term assets that would normally be marked to market, to long-term assets that were intended to be held to maturity. By accounting rules, long-term assets are not updated for current market value, as logic would prevail that the daily market price is irrelevant for an asset you don’t intend to sell in the short-term. However, reclassification can also possibly hide losses from the public view or present a healthier balance sheet than is true.
As a foundational reassurance, the U.S. banking institution is protected by the FDIC, which has $100 billion in funds to guarantee cash deposits to the coverage limits noted. Additionally, the Federal Reserve has gone a step further to create an emergency lending program called the Bank Term Funding Program (BTFP) whose purpose is to protect other banks from the same liquidity problems that created the Silicon Valley Bank collapse. The BTFP offers loans up to one year in length to banks (or eligible depository institutions) by redeeming U.S. Treasuries, agency debt, mortgage backed securities (MBS) and other qualifying assets at par value. In other words, the banks don’t have to realize large losses on government investments that could affect their stability. Instead, banks with long-term assets at a loss could redeem the government investments at par value, keeping liquidity reserves necessary to sustain banking needs and maintain the stability of the U.S. banking industry.
As an investor, this may be a reminder to keep your cash at banks below the FDIC limits of $250,000 for individuals, or $500,000 for joint or corporations. Also, it is important to recognize that equity investments like stocks, ETFs, and mutual funds held at a broker-dealer are segregated assets that are not available to general creditors in the unlikely event that a broker-dealer becomes insolvent. This is a U.S. Securities and Exchange Commission Customer Protection Rule. Further, the Securities Investor Protection Corporation (SIPC), a non-profit corporation created by an act of Congress, provides brokerage customers up to $500,000 of insurance coverage or protection of cash and securities (cash limited to $250,000).
While there is uncertainty in the stock market due to the banking industry, you may have noticed that indexes like the S&P 500 have generally been positive. 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 for the remainder of 2023. A slower pace of interest rate increases or a temporary pause would be generally positive news for the stock market.
In financial planning, it is important to remember that market dips are a normal part of a market cycle. While unpleasant, periods of market decline also keep the overall stock market healthy and the price corrections stop bubbles from forming in the market. Reach out to your Certified Financial Planner™ for a second opinion if the headlines of today warrant a review of your current financial standing. Also, remember to work with a fiduciary, who is committed to putting your interests and well-being first, without bias.
Resources:
1. https://www.forbes.com/sites/anthonytellez/2023/03/28/first-citizen-bank-buying-svb-here-are-other-failed-banks-it-acquired/?sh=1e0df7c3fcaa
2. Schwab Perspectives on the Silicon Valley Bank and Signature Bank Failures
3. Bob Veres, Insider Information: SVB on the Run
4. https://www.federalreserve.gov/newsevents/pressreleases/monetary20230312b.htm
5. https://www.cnn.com/2023/03/19/business/credit-suisse-ubs-rescue
6. https://www.federalreserve.gov/monetarypolicy/bank-term-funding-program.htm