By Clayton Johnson, CFP®
With the announcement of the 2nd and 3rd largest bank failures in US history this weekend, it has felt a bit like Oscar-winning “Everything Everywhere All at Once.” Let us cover a few points that will hopefully help you see that this is not the 2008 crisis all over again and calm any concerns you have about the markets or your money.
What happened with Silicon Valley Bank (SVB) & Signature Bank?
SVB and Signature Bank service very niche clientele such as tech companies, tech owners, and cryptocurrency firms.1 Just like most banks, they take deposits from their customers and invest that cash in fixed income like bonds and U.S. Treasuries. Because of inflationary pressure in the U.S., the Fed has made aggressive interest rate increases over the last year.2 Finance 101 teaches us that as interest rates rise, bond prices decrease. Now, that is fine for bondholders if they do not sell those bonds before they mature. But if they sell them before they mature, they must sell them at a reduced price and recognize a loss. This is exactly what happened to SVB and Signature Bank.
These banks began to slide into insolvency when their customers started a “bank run” and withdrew their deposits at a record pace. In fact, SVB customers withdrew $40B dollars in 4 hours. That is unprecedented and no bank could survive a bank run at that pace. In SVB’s case, the bank had to sell bonds at a loss to cover withdrawals, leading to its failure.
Is this going to lead to widespread bank failures and a recession?
Not likely, despite what some media outlets may be saying with their attention-grabbing headlines. These failures are not any indication of a systemic banking issue. In fact, the nation’s banking system is healthy.3 These bank failures were the result of a perfect storm unique to SVB and Signature Bank. In a special Silicone Slopes Webinar, Utah Senator Mitt Romney commented that “SVB was a good bank. Capital may be King, but confidence is Queen. Nobody can withstand a run. SVB was not doing crazy things.”
It is important to note that the economy is in a very different place today than when Washington Mutual failed in September 2008. In the three months leading up to the Washington Mutual 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 added over a million jobs. In the Silicone Slopes webinar, former Vice Chair of the Federal Reserve Randy Quarles commented that 90% of SVB’s deposits were uninsured (over FDIC limits) but most banks are 50% insured and completely solvent. When your deposits at a bank are FDIC insured, up to $250,000 of your money is insured and backed by the Federal Government. In the case of SBV, 90% of their money did not have that backing because client deposits were well over the $250,000 limit, which is partly why their customers panicked and withdrew money in record amounts.
The Fed made an announcement on Sunday to prevent future losses on bonds for banks. They said they will lend against those bond securities at par, rather than market value.4 This means that banks can get back every dollar they invested to buy bonds and do not have to realize the losses from the bond price decreases. This will allow banks to maintain solvency in case of further large withdrawals from customers.
What does this mean for us and what can we learn from this?
First, make sure any cash held in bank accounts is under FDIC protection limits. Second, it is difficult to predict what the market response will be moving forward. These aren’t the first bank failures (in fact, 489 banks failed from 2008 to 2013) and they won’t be the last bank failures. During periods of market stress, you see a lot of short-term movement in the market that is completely unpredictable. Third, don't panic! Stick with your long-term investment plan even in the face of short-term market volatility. This may be easier said than done, but staying disciplined in your strategy gives you the best chance of achieving your goals.
If you are a client of Squire Wealth Advisors, know that we have planned for this. Your financial plan considers these black swan events, and your investments are diversified across many industries, countries, and companies. If you have any questions or concerns, please reach out to your advisor. We are here to help!
For more information, please view this video on the recent bank failures by Buckingham's Head of Investment Research Jared Kizer.