By David Munn, CFP
Over the past couple weeks, the Federal government intervened to take operational control of two banks, Silicon Valley Bank (SVB) and Signature Bank, NY (SBNY). SVB represents the second largest bank failure in US history and the largest since the 2008 financial crisis.
What happened?
When banks receive deposits from customers, they pursue opportunities to earn a return on those funds. This can be done through giving out loans or a portfolio of investments. While Federal regulations restrict the types of investments banks can utilize and the amount of risk that can be taken, there is still risk.
In the case of SVB, their portfolio of long-term government Treasuries–which are risk-free if held to maturity–experienced significant drops in market value over the last 18 months as the Federal Reserve aggressively raised interest rates.
As new deposits slowed and customers withdrew funds recently, the bank was forced to liquidate these bonds at steep losses, which not only necessitated the bank raise more capital to sustain operations, but also scared customers who panicked and created a bank run. As the bank did not have sufficient cash on hand to meet the massive withdrawal requests, the FDIC was forced to take over and has since insured that all customers will be made whole, including accounts that exceed the $250,000 FDIC limits.
Will there be more bank failures?
We do expect more banks to fail in the coming months, but believe the vast majority of banks are not exposed to the same level of portfolio mis-management. The government’s intervention and guarantee of all deposits will likely alleviate a panic that could have rapidly spread to other banks with weak balance sheets, and allow for a more controlled unwinding–or acquisition– of the failing banks’ operations, as we observed over this past weekend with Credit Suisse.
Is my money in the bank safe?
While it is generally advisable to stay within FDIC limitations on bank deposits, there is no need to panic regarding the security of most banks.
What is the impact on investment portfolios?
Clients of Munn Wealth Management have not had direct exposure to SVB, SBNY, or any of the regional banks which have experienced a sharp sell-off. The overall reaction of the stock and bond markets to the bank failures has been positive as investors are expecting the Federal Reserve to adjust their plans for continued interest rate increases in light of the recent events.
Are my investments at risk if the custodian fails?
Client accounts are always held with a third-party custodian. While banks invest client deposits, custodians are prohibited from doing so with client assets, which is why custodians have other means of generating revenue. If a custodian were to experience a business “failure”, client assets would be preserved and unimpacted.
Munn Wealth Management is registered as an investment adviser with the United States Securities and Exchange Commission. This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client. All readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors. 1323GQH