The Banking Crisis was Averted, but do Risks Remain?
Last week, the FDIC took over Silicon Valley Bank (“SVB”) and Signature Bank after they experienced bank runs. The reason? The government wanted to boost the stability of the overall banking system and effectively protect depositors in the banking system. While some risk remains, it seems the big systemic risks are now lower.
Other banking headlines include how behemoth Credit Suisse is borrowing up to $54 billion from the Swiss National Bank. While this kind of news is scary when it comes to our money, I still encourage investors to remain disciplined about following their long-term savings and investment plans.
Here are more details about what's going on.
Why did the U.S. government take over Silicon Valley Bank?
In their simplest form, banks gather deposits from clients including individuals and corporations, and pay those clients a short-term interest rate. They then invest some of those deposits into fixed income securities, like U.S. Treasuries or mortgage-backed securities.
At SVB, there were two situations that happened at the same time and led to the bank run:
Like many investors’ fixed income portfolios, some banks experienced substantial market declines during 2022. With a smaller balance in these fixed income portfolios, banks have less money to repay their depositors if they decide to withdraw their money.
While one depositor wanting to withdraw their money isn’t really a problem, if enough depositors decide to do so, the result is a bank run. At SBV, the run risk was higher because there was a high concentration of venture capital-backed companies with deposits at the bank.
This resulted in liquidity risk, which the government wants to prevent.
How did the government respond to the bank run at Silicon Valley Bank?
The government acted quickly to bolster confidence in the banking system. The steps that were taken over the weekend included:
The Treasury pledged to fully protect all Silicon Valley Bank (SVB) and Signature Bank deposits. This will help minimize the impact on SVB’s technology-heavy client base, and it also should help reassure depositors of other banks as well.
Ensuring Bank Liquidity
Reminiscent of the alphabet soup of acts we saw during the global financial crisis, the Board of Governors of the Federal Reserve System (“the Fed”) is creating a program called the Bank Term Funding Program (BTFP) to support other banks in a similar situation to SVB.
The program will offer loans to banks and treat all collateral at 100% of its face value.
As an example, if a Treasury bond was purchased for $100 and has declined in price to $90, the Fund will treat the bond’s value at $100 for collateral purposes.
This temporarily eliminates the fixed income portfolio loss issue discussed earlier.
The loans are good for one year, allowing banks to raise additional capital or seek financial partners.
The fund is designed to be large enough to protect all uninsured deposits in the wider U.S. banking system.
These actions focus on protecting depositors, increasing confidence of the banking system and substantially reducing the risk of another financial crisis. (Though it's important to note that this program doesn’t protect shareholders or debt holders.)
Is this related to the troubles at Credit Suisse Bank?
Not really, because the 167-year-old bank has a long list of issues that go back decades. But, the bank is one of only 30 global financial institutions listed as a "global systemically important bank" by the international Financial Stability Board. In other words, it's too big and too important to the global economy to fail.
What should investors do?
It’s so important to understand that this situation isn’t a repeat of the global financial crisis. Why is this? Banks are better capitalized, and the government has learned a lot of hard lessons on how to handle bank failures. And the root causes of today’s issues are very different.
While we should expect additional fallout and volatility, in every economic and market cycle there are risks—and there are opportunities. And there can be a real cost to waiting for an economic recovery before investing as the table below from JP Morgan Asset Management shows.
The same concept can be applied to pulling money out of your investments during times of market volatility, which I talked about in a past blog post about the history of bull and bear markets.
As one of my favorite industry leaders Carl Richards with the Behavior Gap says, "try as we might to predict what will happen with the economy and market, it just leads to guessing. And guessing it no way to make investment decisions. Over time (think 10, 15, or 20 years), stocks typically do better than bonds, and bonds typically do better than cash. And a diversified portfolio will help protect you from the variability of the stock market."
This is why I'll continue to encourage my clients to stay invested through recessions and bear markets and remain disciplined with their long-term investment and savings plans.
That said, it’s completely normal to feel angst about the headlines and feel like you need to do something. That something can be talking to a financial professional with experience navigating the ups and downs of market cycles. So much the better if that someone is not only willing to share market data from the past to reflect on the present, but will listen to your concerns and fears without judgement.
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This is for informational purposes only, is not a solicitation, and should not be considered investment, legal or tax advice. The information in this report has been drawn from sources believed to be reliable, but its accuracy is not guaranteed, and is subject to change.
Investing involves risk, including the possible loss of principal. Past performance does not guarantee future results.
Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns. There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio. No investment strategy, such as asset allocation, can guarantee a profit or protect against loss.
Actual client results will vary based on investment selection, timing, market conditions, and tax situation. It is not possible to invest directly in an index. Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. Index performance assumes the reinvestment of dividends.
Investments in equities, bonds, options, and other securities, whether held individually or through mutual funds and exchange traded funds, can decline significantly in response to adverse market conditions, company-specific events, changes in exchange rates, and domestic, international, economic, and political developments.
105476 | C23-19748 | 03/2023 | EXP 03/31/2025