What a Weekend for the Banks

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What a Weekend for the Banks

Posted on March 14, 2023

This past weekend, the FDIC took control of Silicon Valley Bank (SVB)[1] and Signature Bank[2]. Larson has no assets held with either of these institutions, and there is no direct impact to Larson from these bank failures or the FDIC’s actions.

Situations like these can be confusing, but our professional experience and understanding of banking and the current state of regulation can help provide a better understanding of SVB’s circumstances and their limited reach.

The federal government is taking action to ensure depositors can access their funds, even if the account balances exceeded the FDIC-insured amount of $250,000. President Biden said in his press conference Monday, “Americans can have confidence that the banking system is safe. Your deposits will be there when you need them.”

Larson founder and CEO, Paul Larson says, “We want to reiterate that it is wise to keep less than $250,000 in a cash account, and instead use other investment vehicles not held directly at banks to diversify and protect your assets.” The FDIC insures deposits up to $250,000 per depositor, per insured bank, for each ownership category.[3] This means that deposits over this amount are not guaranteed. In this case with SVB and Signature Bank, all deposits will be protected, but it’s best practice to spread deposits to several banks if your balance exceeds $250,000.

Larson Chief Investment Officer Michael Robbins remarked, “SVB is different from most banks because their specialized and unusual clientele consisted mostly of tech firms and venture capitalists. Most banks have a broader client base, and many tech firms require interest rates to be low to be successful. When interest rates go up, their clients stopped making deposits—making SVB doubly exposed to rising rates. SVB had to dip into their assets that weren’t priced at current low levels for accounting purposes, and they took a huge loss by realizing accurate valuations when they were converted from ‘held for investment’ to ‘available for sale.’”

Robbins further added that because SVB was exposed to this special demographic in an exceptional and important way,[4] “This was likely an isolated event that our clients should not have to worry about in regard to the overall economy.” Specifically, the new Bank Term Funding Program (BTFP) which was announced on Sunday now allows banks to borrow from the federal reserve at the par value of their collateral, not the marked-to-market value. This provides relief to banks who need to reclassify held for investment assets to available for sale.

During the recent low-interest rate environment, the thriving tech sector increased deposits to SVB. A significant portion of those cash reserves were then invested into low-risk long-term government bonds. However, the value of those bonds started to decrease after the recent interest rate hikes by the federal reserve.

From NPR, “Those rate hikes came just as there was contraction in funding for startups. Tech companies were spending company cash fast, and they were having a hard time replenishing the funding in the face of a challenging fundraising market.”[5] Even companies capable of securing financing were forced to pay higher rates of interest, disrupting their fragile business models that relied on cheap money.

That, in turn, led to startups saving less money in Silicon Valley Bank, starving SVB of the capital they required. This forced the lender to sell part of its bond holdings, triggering an accounting rule that caused them to report a steep loss of $1.8 billion.

The announcement of the bond sale sparked more depositors to pull out their funds. Signature Bank then withdrew more than $10B in deposits, prompting the federal government to protect depositors.

Larson advisors focus on creating long-term solutions through diverse portfolios and holistic financial planning. Our experience shows that when confusing situations like these arise, our resources give clients reassurance and comfort.

These circumstances should be viewed as an opportunity to review your financial plan with your advisor and go over your current portfolio holdings. Contact us today to schedule your next check in.

[1] “FDIC Creates a Deposit Insurance National Bank of Santa Clara to Protect Insured Depositors of Silicon Valley Bank, Santa Clara, California.” FDIC.gov, 10 March 2023. https://www.fdic.gov/news/press-releases/2023/pr23016.html

[2] FDIC Establishes Signature Bridge Bank, N.A., as Successor to Signature Bank, New York, NY.” FDIC.gov, 12 March 2023. https://www.fdic.gov/news/press-releases/2023/pr23018.html

[3] “Deposit Insurance At A Glance.” FDIC.gov, 13 September 2022. https://www.fdic.gov/resources/deposit-insurance/brochures/deposits-at-a-glance/

[4] Both SVB and Signature had an extremely large number of uninsured depositors (more than 90%). Signature and Silvergate were highly exposed to cryptocurrencies.

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