Bank Failure! Should we be concerned?
I felt it was important to educate my clients about the recent news that should become even bigger this week. Silicon Valley Bank(SVB) was taken over by the FDIC and is considered one of the biggest bank failures of all time. So what happened and should you be worried?
SVB took on a large volume of deposits between 2019 and 2021. When banks accept deposits they must invest that money to pay for their expenses and the interest owed on those accounts so they typically lend it to borrowers as mortgages or loans at interest rates based on standard market rates.
A very large portion of SVB's deposits were from tech companies and Venture capitalist firms. Because of the large amount of deposits, SVB realized they need to be more conservative when they invest them so they can meet the liability of returning the deposits.
Unfortunately, they purchased US treasuries and mortgage backed securities, which are considered lower risk but they bought them at longer maturities in the 10+ year range. The longer the maturity, or duration, of the bond the higher the sensitivity to interest rate movements.
As you probably know, the Fed has been quickly raising rates which is causing interest rate sensitive security prices to fall exponentially. On top of this, because they are using deposits/ their liabilities to purchase these investments, they are leveraged. Which means their investments are even more sensitive to market fluctuations.
When SVB bought the "conservative" investments, they weren't paying a high interest rates like we see today. This means the value of their investments are dropping and the interest rates aren't keeping up with withdraw and interest rate needs for depositors.
Anyone who has amounts over the FDIC insured amounts start to recognize this and starts withdrawing. As more bank clients start to see this, the herd follows and the run on the bank begins. Think It's A Wonderful Life.
SVB had to sell those conservative investments at a loss and couldn't meet withdraw demands so the Federal Home Loan Banks (FHLB) stepped in to create liquidity to help meet the withdraw demand.
Should you be concerned?
There was a large ripple effect that engulfed well known firms such as Charles Schwab. This is very common when there is big news on the feeds. The difference is that SVB worked with tech and VC companies which are know have had their troubles in 2022 so they needed to protect their cash reserves and use cash to cover higher borrowing costs. Very little of SVBs deposits were retail unlike many other banks.
If you have more than the FDIC insurance or SPIC insurance coverage than you could protect yourself by spreading your assets amongst a few banks to keep most of your assets covered. Bank failure will always be a risk and many of us are more aware of it because of SVB and the too big to fail situation from 2008. To me, I am not concerned about this but I can see many regional banks having similar issues because treasuries have long been used as conservative ways to invest deposited assets. If the bank has enough short-term assets to cover deposits, then there is no concern.
I am not alarmed for my clients because these are conversations that are had through the planning process because risk management is a big part of my process. If you are still concerned then it might be wise to ask your bank how the deposit are invested so you know if they have a large enough moat to withstand these types of issues.
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