Banking Failures & What Happens Next
Two large banks failed within days of each other, which prompted Federal regulators to step in on Sunday to protect depositors. A joint announcement by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp was then made to shore up waning confidence in the banking system.
Regulators said the depositors of Silicon Valley Bank (SVB), would have full access to their money starting Monday. They also said they would protect depositors of Signature Bank (SBNY), that was forced to close on Sunday.
I want to briefly outline some common questions that many people have right now with some insight on what’s happening and action that Trinity is taking.
HOW DID THIS HAPPEN?
The problem that SVB had with its investment securities was that the rise in interest rates last year depressed the market value of usually “safe” assets (long-term bonds) who will repay the banks’ money, just not for an extended period of time, eight to ten years out.
As the Federal Reserve raised its benchmark interest rate, the value of these bonds, typically a stable asset, started to fall. That is not usually a problem, as the declines lead to “unrealized losses,” or losses that are not counted against banks when calculating the capital cushion they can use should there be a downturn in the future.
However, when depositors grow anxious and begin withdrawing their money, banks sometimes have to sell those bonds before they mature to cover withdrawals. That can lead to a deteriorating and unrecoverable situation.
This is not considered a ‘bailout’ as shareholders and debtholders of the two banks will effectively be wiped out. Only depositors will receive protection from the FDIC.
WHAT IS FEDERAL DEPOSIT INSURANCE?
In many cases, these banks’ deposits weren’t covered by the deposit insurance that is familiar to many individual bank customers. FDIC insurance typically extends up to $250,000 for a deposit. But SVB and Signature both had most of their deposits in accounts that were larger than that, such as corporate accounts. So, they were effectively uninsured.
This is the nature of these banks’ business models. Many of SVB’s clients were venture-funded tech companies. Signature focused on private companies, and more recently on cryptocurrency firms. Signature said in its annual report that as of the end of last year, nearly 90% of its total $88.6 billion deposits weren’t FDIC-insured.
ARE ALL UNINSURED DEPOSITS NOW COVERED BY GOVERNMENT GUARANTEES?
No. The regulators said they were making an exception for SVB and Signature. The SVB action was taken in consultation not only with many regulators but also with President Biden—indicating the unusual nature of their move. Signature was similarly protected under a “systemic risk exception” to backstop its uninsured deposits.
Regulators said any losses to the Deposit Insurance Fund to cover uninsured deposits would be recovered by a special assessment charged to banks.
DOES THAT MEAN OTHER BANKS ARE STILL VULNERABLE?
The Federal Reserve took another action on Sunday by establishing the Bank Term Funding Program.
This will ensure that a bank that is holding safe assets, such as Treasurys or government-backstopped mortgage bonds, can bring them to the Fed and swap them for cash for up to a year. They could use that cash to grant customers’ requests for their deposit money. The purpose is to help banks that run into similar liquidity problems as SVB to meet redemptions.
WHAT ABOUT THE FINANCIAL HEALTH OF CHARLES SCHWAB?
Given the market environment, Schwab released their own commentary on recent developments and addressed their financial strength, which can be fully read through the link below.
https://www.aboutschwab.com/perspective-on-recent-industry-events
In addition, Schwab noted that they do not have any direct business with Silicon Valley Bank or Signature Bank, and thus have no exposure to direct credit risk from either one.
IS TRINITY TAKING ANY ACTION IN LIGHT OF MARKET DEVELOPMENTS?
We are making one change in money market holdings for our clients. Even during the financial recession of 2007-2009, Schwab’s money market mutual funds never traded below their stable value of $1.00 per share. The Schwab money market mutual funds we have utilized over the years hold very short term (30 days or less maturity) commercial paper as the underlying asset. Commercial paper is short-term debt issued by corporations, banks and insurance companies. In light market developments, effective today, all money market holdings will be moved to Schwab U.S. Treasury Money Market Mutual funds. The Treasury money market funds earn a little lower yield but have the highest credit worthiness of any issuance. It is an intentionally cautious decision and believe it is the prudent action to take at this time.
This has been a fast-developing crisis and it’s unclear what, if any, further ramifications emerge in the days ahead. Please know that we are here to answer any of your questions. This again underscores the value of time invested upfront with each of you. By formulating a solid and adaptable financial plan together and discussing liquidity, cash flows, and reserves, provides the solid footing and peace of mind needed during volatile moments like the ones we are seeing play out in real time.