What's Going On With Banks?
It’s often counterproductive to comment about breaking news while it’s still moving through the proverbial grinder … which is why we usually don’t do so. However, after hearing about major shakeups in the banking sector, we know that many may be wondering whether their assets are safe. We’d like to offer some thoughts and suggestions.
First, what happened?
Recently, Silicon Valley Bank announced that it had sold a large portion of its bond portfolio to generate cash (in order to avoid a credit downgrade), triggering panic amongst clients who had deposits well above the Federal Deposit Insurance Corporation limits. Afraid of losing their uninsured deposits, bank customers rushed to pull their money out. This, essentially, created a bank run that triggered SVB to collapse.
SVB’s tech-heavy clientele had deposited large amounts of cash during the pandemic when the industry was awash in undeployed assets. In turn, the bank used the money to buy Treasury and other bonds. The result is that SVB held large reserves of low-yielding bonds (well above industry averages). As the Fed aggressively raised interest rates, prices for SVB’s long-term bond holdings fell steeply. At the same time, interest-rate-sensitive tech firms began to pull cash out to cover their own cash needs, triggering SVB to sell off a large portion of their bond holdings, resulting in a serious hit to their balance sheet, and leading to the bank run. SVB didn’t have enough cash on hand to cover all the desired withdrawals. A similar situation happened shortly thereafter with Signature Bank.
Are my bank deposits at risk?
Bank deposits, such as savings accounts and certificates of deposit, are typically considered low-risk investments because they are insured by the FDIC (Federal Deposit Insurance Corporation) up to $250,000 per depositor, per account, which means that even if the bank fails, depositors are guaranteed to receive their money back (up to the insured amount). Your bank account balance is at risk only if it exceeds the FDIC limit, and your bank fails. Of course, in the case of SVB, the Federal government covered deposits over and above the FDIC limits, though we don’t recommend counting on this backstop in the future.
What about my investment portfolio?
Securities are subject to different types of risk than bank deposits and are protected by SIPC (Securities Investor Protection Corporation), a non-profit corporation established by Congress in 1970 to provide protection for customers of brokerage firms in the event of a member firm's failure. More importantly, brokerage firms like Schwab and Fidelity *segregate customer assets from firm assets* and thus customer assets are not exposed to the firm’s creditors if they should fail. This is the near opposite of a bank deposit, where your money becomes an asset on the bank’s balance sheet subject to their promise to give it back to you on demand. Literally hundreds of banks have failed in the past few decades, which is why we need the FDIC to begin with. SIPC's main function is to provide insurance protection for customers of failed brokerage firms. In the event of a brokerage firm's failure, SIPC steps in to restore funds to investors if the brokerage firm is unable to return their securities and cash. SIPC protection is limited to a maximum of $500,000 per customer, of which up to $250,000 can be cash. This means that if a brokerage firm fails, SIPC will cover losses up to these limits.
What type of situation does SIPC cover?
Think Bernie Madoff. Madoff Securities had no segregation of customer assets because frankly, the customer assets were a mirage: the classic Ponzi scheme. SIPC provided a level of protection for those clients, and since then the bankruptcy trustee has recovered the majority of the assets lost.It's important to note that SIPC protection does not cover losses resulting from a decline in the value of securities or any other investment losses. It only provides protection for the custodial function of a brokerage firm, which means that it covers losses resulting from a brokerage firm's failure to deliver securities or cash that they owe to their customers.We are fortunate that the market for consumer brokerage accounts is diverse and robust. Brokerage failures are relatively rare. In the unlikely event that Schwab or Fidelity was to fail, the customer assets would be relocated by the SEC and FINRA to another member brokerage, akin to the failure of Lehman or Bear Stearns in 2008-09. Certainly, there was inconvenience and anxiety at the time, but the customers’ assets were intact.
Is there anything I should do now?
If the cash you hold in any one bank exceeds FDIC protection, there may be value in working out a plan to address that issue. We recommend you keep bank deposits below the FDIC insurance amount of $250,000 per person/ $500,000 per couple, per account. Note that the $250,000 limit is per depositor, per account – you can keep as much FDIC-insured cash as you like by spreading it out so no one bank account exceeds the insurance amount.
We're here to answer client questions - feel free to reach out any time.