Following the failure of two banks over the past few days, I wanted to provide some thoughts and insights into what happened, the response of policymakers, and key takeaways. There is still much to learn in the coming weeks and months, not the least of which is any potential impacts on other banks. I will do my best to keep you updated and informed as needed.
In simple terms, Silicon Valley Bank experienced a bank run, in which a large number of depositors withdrew their money simultaneously, impacting the short-term liquidity of the bank and leading to failure. Bank runs have been occurring for centuries, as banking is built on trust, and when that trust deteriorates, customers tend to take swift action. There is no question that Silicon Valley Bank underestimated its risk in both its investment and client industry concentration – which is water under the bridge at this point. If you’d like read a more in-depth article about the events that transpired, Matt Levine published a great one here: https://www.bloomberg.com/opinion/articles/2023-03-10/startup-bankhad-a-startup-bank-run
Last night, the US Treasury, Federal Reserve, and FDIC released a joint statement (Federal Reserve Board – Joint Statement by Treasury, Federal Reserve, and FDIC) announcing that all depositors will have access to their funds today (Marth 13th) whether above the $250k have access to their funds today (Marth 13th) whether above the $250k FDIC limit or not. This is unequivocally the right decision for customers. While you can make an argument that having more than $250k in a bank account does expose you to some bank failure risk, $250k is unlikely to be sufficient for the capital needs of large and mid-sized businesses, thus requiring them to hold cash above the FDIC limit in order to function. Most importantly, choosing your banking partner should not require businesses to have a Ph.D. in risk management or the ability to complete substantial due diligence into the nuances of bank’s balance sheet… after all that is what bank regulation is for. Another conversation for another day is why a number of these large companies didn’t have secondary and tertiary banking partners to reduce this risk, but I won’t be delving into that today.
Considerations moving forward:
Banks exist on the basis of trust. Customers trust that their bank will prudently manage their cash so that it is available as needed. The actions of policymakers late Sunday solved the trust issue for the failed banks, but only put a band-aid on the trust concerns for customers of small and medium banks nationally. It really comes down to this: Will customers continue to work with smaller institutions following the events of the past few days? Small and mid-sized banks serve a very important role in our economy and the actions of policymakers show that they understand this and want to quell any concerns their clients may have, which is exactly what we should hope for.
1. Banks are not immune to going out of business – they are just like any other company. While policymakers have backstopped all bank customers, investors (and company management) will not be made whole for their losses. Consider this a bailout for bank customers but not bank investors.
2. Policymakers have stepped up to backstop customer deposits at the failed institutions, signaling that if any other banks end up in a similar situation, their customers will be made whole as well. Policymakers also created a new program to provide liquidity to banks in the hopes of preventing additional bank failures from occurring in the first place. Make no mistake, this program’s explicit intent is to ensure the success and survival of small and mid-sized banks nationally to preserve the services they provide.
3. Once fear enters the market, it tends to persist. Expect to see a deluge of articles in the coming days and weeks stoking fear and uncertainty. Feel free to read them for informational purposes while not changing your longterm investment plan.
The events of the past few days highlight the importance of a diversified investment portfolio to minimize your exposure to a single company or industry. They also highlight some of the benefits of maintaining a relationship with more than one banking institution (even with the hassle that accompanies this).
Please reach out if you have any questions about this note or any possible impacts to your specific plan.
Disclosure: This material has been prepared for informational purposes only and should not be used as investment, tax, legal or accounting advice. All investing involves risk. Past performance is no guarantee of future results. Diversification does not ensure a profit or guarantee against a loss. You should consult your own tax, legal and accounting advisors.