Today’s Banking Environment
The news of bank runs in March caught much of the financial sector by surprise and created confusion among the American public. To help put the news in perspective, we’ve assembled a brief explanation of what happened, a list of some of the wider effects, and a reminder of smart banking practices. As always, ShankerValleau is here to help. Please don’t hesitate to reach out to us if you have questions as current events unfold.
The biggest shockwaves have come from banks that have been holding exceptionally large reserves of low-yielding bonds in today’s higher interest rate environment.
In the case of Silicon Valley Bank (SVB), for example, its tech-heavy clientele 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. [Source]
As interest rates rose, prices for SVB’s bond holdings fell. Normally, this wouldn’t be a problem; whether you’re a bank or an individual investor, as long as you simply hold low-yielding bonds to maturity, you can expect to be made whole at the end. But if too many of a bank’s customers pull out their money all at once, as happened at SVB, the bank may be forced to sell their low-yielding bonds at a loss, to meet the sudden demand for cash.
What’s Going To Happen Next?
Bank Risks: To date, it would appear that the most at-risk banks are those that are holding large percentages of uninsured deposits.
To expand on that point, today (versus during the Great Depression’s bank runs), the FDIC insures up to $250,000 of each bank customer’s deposits. If you’re married, each of you receive protection of up to $500,000 on a joint account. If an account exceeds FDIC limits, the excess is uninsured. In the case of SVB, approximately 90% of its deposits were uninsured. That translates to a lot of big accounts with uninsured balances.
Government Action: The Treasury Department, the Federal Reserve, and the FDIC moved quickly to confront the problems head on.
• To staunch the immediate “bleeding,” these Federal institutions are taking a number of joint emergency actions to protect affected account holders, in some cases promising to protect even those whose accounts exceed FDIC insurance levels.
• Discussion is underway on how to shore up any systemic concerns over time. For example, there’s already calls for re-tightening banking controls such as capital requirements and liquidity rules for small- and mid-sized banks. [Source]
Best Banking Practices
In the meantime, there are your own cash reserves and investments. Unfolding events do underscore one important consideration. If the cash you hold in any one bank exceeds FDIC protection (or, in the case of brokerage cash accounts, SIPC limits), there may be value in working out a plan for addressing that issue. If you find yourself holding uninsured bank balances, please contact us to discuss possible solutions. While we are often investment focused, a healthy cash cushion, protected by the FDIC, is an important part of your financial life.
We’re Here, as Usual
If you have cash holdings at an affected bank or if you are concerned your deposits at a single bank exceed FDIC limits, please let us know, so we can advise you accordingly. At ShankerValleau we know that maintaining safe and sound bank deposits is important to both your financial health and peace of mind.