Bank On It
A series of bank failures have shaken the markets in recent days.
Notable among them was the recent failure of Silicon Valley Bank. Silicon Valley Bank (SVB) served tech startups backed by venture capital. In the rising interest rate environment that we are in, venture capital firms have not been funding their portfolio of startups as aggressively as they had in the past. This caused the deposits at SVB to decline.
SVB’s business model is as a deposit bank. They make money by taking large deposits (often tens of millions of dollars) in venture capital funding, and then invest those funds in US Treasuries. Due to rising interest rates, bond prices had fallen dramatically and posted the worst year on record in 2022. This meant SVB had to sell their Treasury Bonds at a loss and they needed an influx of capital to shore up their balance sheet. When they struggled to get the additional capital, their clients became concerned the bank might fail.
Another problem the bank faced is that they did not have a diverse base of client. A relatively small number of venture capital firms controlled a large percentage of their clients. When the venture capital firms advised their clients to withdraw funds there amounted to a run on the bank (think of the scene from “It’s a Wonderful Life”). The quick exodus of deposits created a solvency issue for the bank and government regulators stepped in and took over.
SVB is a unique situation – a large deposit bank, with a very niche and non-diversified clientele, who have universally been struggling with the economic downturn and held deposits well in excess of FDIC insurance limits. However, their failure has cast a shadow on the entire banking industry. Clients at all local banks have been concerned that the same thing might happen locally. The S&P Regional Banks Select Industry Index is down close to 30% over the last month.
On Sunday night, the Treasury, Federal Reserve, and FDIC issued a joint statement seeking to instill confidence in the banking system and made a decision to protect all depositors, regardless of account size, at SVB and Signature Bank in New York. The implication is that they would do the same thing for other banks that might fail. To be clear, this protects the clients of the bank, but not the banks themselves.
While the recent bank failures are certainly a concern, and perhaps a symptom of larger economic troubles, we don’t think there is widespread risk in the regional banking model or that this is going to evolve into a universal banking collapse. Most regional banks are well diversified, in much better economic shape and have strong relationships with their depositors. Rising interest rates, however, have been difficult for all bond holders, banks included.
As a result of this, Interest rates have fallen quickly with the belief that the Fed may slow or stop their rate increases to protect the economy and banking sector. The rate on the 2 year Treasury has fallen from close to 5% to 4% practically overnight.
At Pointer, we’re always focused on staying prudently invested, and that prudence extends to the custodians we use. Both TD Ameritrade and Charles Schwab are in good financial shape. Both FDIC insurance (up to $250,000 per account holder) and SIPC insurance (up to $500,000) protect client assets. On top of that, the custodians have additional insurance in place protecting client accounts in excess of $150,000,000 per account in case of a brokerage failure. Together, Schwab and TD Ameritrade have nearly $9 Trillion in assets under management, and with that size comes significant security.
On the retirement side, 401(k) participants have their assets held in trusts which carry the same or similar levels of protection and security.
We’re paying close attention to the developments within the banking industry and economy as a whole, but at this time, we believe the banking industry to be stable and expect the current fear to subside.
If you have any questions, please do not hesitate to reach out.
The information given herein is taken from source that IFP Advisors, LLC, dba Independent Financial Partners (IFP), IFP Securities, LLC, dba Independent Financial Partners (IFP), and its advisors believe to be reliable, but is not guaranteed by us as to accuracy or completeness. This is for information purposes only and in no event should be construed as an offer to sell or solicitation or an offer to buy any securities or products. Please consult your tax and/or legal advisor before implementing any tax and/or legal related strategies mentioned in this publication as IFP does not provide tax and/or legal advice. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. This report may not be reproduced, distributed, or published by any person for any purpose without IFP's express prior written consent.