Navigating the Banking Crisis: What You Need to Know
This past weekend, U.S. regulators took control of Signature Bank (SBNY), coming on the heels of a similar takeover of Silicon Valley Bank (SVB) late last week. In response, President Biden addressed the actions taken by stating: “Thanks to the quick action of my administration over the past few days, Americans can have confidence that the banking system is safe. Your deposits will be there when you need them.”
However, the recent events have left investors with uncertainty, leading to several questions. Will more banks be forced to fail, and if so, will depositors be made whole? How could SVB and SBNY have mismanaged their balance sheets? And, ultimately, should investors be taking any action to mitigate risks to their own portfolio?
Although it is unclear how many banks may be in a similar position, the Federal Deposit Insurance Corporation (FDIC) has announced full protection for all depositors of both SBNY and SVB. This is significant as the FDIC’s mandate is only to protect bank customers up to $250,000 per depositor. However, the FDIC typically arranges for another bank to acquire the failed bank and assume all deposits, even those above the insurance limits. It is worth noting that outside of the Global Financial Crisis, there have been few failures.
On a positive note, the U.S. Treasury, the Federal Reserve (Fed), and the FDIC shared in a joint statement on Sunday evening that “no losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.” Although it is unclear what actions will be taken by these agencies, the goal is to prevent panic by granting the leeway to engage in special actions and liquidity facilities. Fortunately, the Fed is held to a high standard and congressional oversight with respect to these unusual policies.
What sets this situation apart from the Global Financial Crisis is that both banks served very specific types of consumers and businesses, mainly in the technology and start-up sectors. Both banks made the catastrophic mistake of lending too much of their balance sheet in longer-term loans when flooded with deposits from venture capital firms in Silicon Valley at a time when interest rates were extremely low. As interest rates continued to rise, these banks found themselves in precarious positions when deposits simultaneously receded.
Although the swift response from the government seems to have calmed the broad market, the SPDR S&P Bank ETF (KBE), an exchange traded fund that holds a diversified portfolio of bank stocks, was down nearly 10% today (March 13, 2023), reinforcing the merits of portfolio diversification. And while the last thing we want is to contribute to the panic, we recommend limiting bank deposits to $250,000 per registrant at any single institution. With many banks still paying very little interest, there are better options for investors. If you have any concerns about your cash-held funds, please reach out to your Truepoint team.