When Banks Fail, What Can You Bank On?

The banking industry plays a vital and key role in our economy and our daily lives.  When large banks fail in an industry as tightly regulated as banking is, as we observed recently with the closure of California’s Silicon Valley Bank and Signature Bank of New York, the event understandably dominates headlines and causes concern and sometimes panic. 

What logically follows is a myriad of questions that many of us have regarding these bank failures.  What does the collapse of the second and third largest banks in U.S. history mean for me?  Are we on the precipice of another banking crisis similar to the one we experienced in 2008?  Are banks still a safe place to keep my money?  How do these events impact my financial plan going forward?

How Did This Happen?

To begin to answer these important questions, we need to first understand what happened with Silicon Valley Bank and Signature Bank of New York.  Silicon Valley Bank (SVB), formerly the 16th largest bank in the nation, appears to be the victim of a massive bank run by large depositors and poor investing decisions.  Primarily serving clients in the technology industry hit hard by rising interest rates and the economic volatility of 2022, SVB experienced large withdrawals of deposits from its customers needing capital for business operations.  As the pace of withdrawals quickened, SVB was compelled to sell long-term Treasury bonds at a loss to meet rising liquidity needs for their customers.  This led to a loss of confidence in the bank’s viability and the further depletion of deposits by customers, many of whom had deposit amounts higher than FDIC-insured limits ($250,000).  When SVB was no longer able to meet deposit requests, the Federal Deposit Insurance Corporation (FDIC) stepped in to provide liquidity to depositors requesting their money and took over operations of the bank.

The story with Signature Bank, formerly the 29th largest national bank, played out much the same way.  Serving crypto currency and real estate investors alarmed at the rapid demise of SVB, Signature saw over $10 billion withdrawn by depositors on Friday March 10th.  By the following Sunday, the FDIC once again stepped in to provide liquidity and provide stabilization.

Despite reassurances from industry regulators that these were isolated incidents, roughly a week later word of Credit Suisse’s failure hit the newswire.  A short time later, news of the acquisition of Credit Suisse by UBS emerged, as the Swiss government quickly brokered a deal.  First Republic Bank, another U.S. Bank headquartered in San Francisco, experienced a 67% drop in the value of its shares before receiving a $30 billion lifeline from other major U.S. banks on March 13th.

What Does this Mean for the Banking Industry?

The reaction to the weekend news rattled markets and many bank stocks experienced heavy losses in rampant trading as markets reopened the following Monday.   The FDIC has quickly stepped in to provide stability to the banking industry to prevent further damage and has pledged to fully back and reimburse uninsured depositors who had more than $250,000 FDIC insured limit in either of the failed banks.  The Fed has also pledged to provide an emergency lending program that will provide funding to banks that are at risk for limited liquidity and similar bank runs.

In the long-term regulators will need to examine the reasons that two major banks in the U.S., and a global bank the size of Credit Suisse all failed.   We can expect the usual political grandstanding from both parties attempting to pin the recent bank failures on each other, but clearly tighter regulations must be put in place and enforced to prevent similar stories from playing out in the future.

Regulators and government leaders have engaged in discussions of temporarily increasing FDIC insurance limits to restore confidence in bank depositors.  This event has also brought about a great deal of speculation about whether or not a much-anticipated interest rate hike by the Federal Reserve will occur this month, and what magnitude that rate hike might be in light of the damage that rising rates did to these banks’ bond portfolios.

Most Americans already receive protection of their assets from bank and broker-dealer failures by the Federal Deposit Insurance Corporation (FDIC) and Securities Investor Protection Corporation (SIPC).  The FDIC currently insures deposits up to $250,000 per depositor, per account ownership category, per bank, including checking and savings accounts, certificates of deposit (CDs) and money market accounts.  But not all banks are FDIC insured, so be sure to check that your banking institution(s) is/are insured by the FDIC. 

Similarly, the SIPC provides up to $500,000 in insurance per customer for cash and securities held by a broker-dealer.  It is important to note that SIPC insurance only protects against the insolvency or fraud of broker-dealers, and not against market losses or fluctuations of investments.  Clients of Bollin Wealth Management who custodian assets with Charles Schwab and/or TD Ameritrade will be relieved to know that both institutions are protected by the SIPC.

How Does this Impact My Financial Plan?

2022 was a difficult year for investors, and recent news headlines have understandably spooked many investors, leaving many of us asking what this means for our financial planning efforts and our retirement plans?  While the immediate impulse may be to “do something” to relieve the angst we feel from reading recent news headlines, we need to remember that our financial plans have been designed with the following three time-tested and immutable investment principles in mind.

Principle Number One: Uncertainty is Unavoidable

Investment markets react to news every single day, therefore we must accept that we must deal with daily uncertainty as a condition of earning expected investment market returns.  Consider the following evidence provided by some of the leading minds in the world of finance at Dimensional Fund Advisors (DFA). 

For the three-year period ending on 2/28/2023, the Russell 3000 Index (a broad market-capitalization-weighted index of US public companies) provided an annualized return of 11.79%!  Despite the Coronavirus pandemic, record rates of inflation not seen in forty years, the Russian invasion of Ukraine, steeply rising interest rates, persistent recession fears, and the most divisive presidential election in decades, the Russell 3000 Index returned 11.79% on an annualized basis the past three years.   If that isn’t a compelling reason to maintain investment discipline, I doubt anything will convince you. 

Principle Number Two: Market Timing is a Futile Effort

Research has shown time and again that market timing strategies are doomed to fail, although the seduction of avoiding short-term investment market losses with tactical portfolio maneuvering is very strong.  As we observed in 2009, and again in 2020, investment markets can reverse course quickly and investors sitting on the sidelines are sure to miss out on at least part of the ensuing investment returns.

Principle Number Three: Diversification is Your Buddy.

Attributed to Nobel Laureate Merton Miller who is noted to say “diversification is your buddy,” diversification is a powerful tool for reducing many of the risks that investors face.  This is illustrated perfectly in this information recently shared by Dimensional Fund Advisors. As of 2/28/2023, Silicon Valley Bank (symbol SIVB) represented a mere 0.04% of the Russell 3000 Index.  Furthermore, regional banks as reflected in the weight of the GICS sub-industry, represented only 1.70% of the Russell 3000 Index.  Both numbers reinforce the notion that diversification is indeed your buddy and emphasize the folly of making detrimental investment decisions based on emotional responses to news that impacts such a small portion of your investment portfolio.

In Conclusion

Disciplined investing strategies are a critical component of your successful financial planning efforts.  Disciplined investing strategies anticipate both good and bad times are going to occur, without having to make predictions or attempting to time markets. 

Human nature tells us that we should be doing something to protect our investment portfolios when the unexpected occurs, like the recent failures of Silicon Valley Bank, Signature Bank and Credit Suisse.   Successful investors can more easily ignore that urge and the noise that comes from day-to-day market movements, knowing that planning for what can happen is a more powerful strategy than trying to anticipate and predict what will happen next.

If you would like to discuss the recent events in the banking industry and its ramifications for your financial plan, or you would simply like to take some time to review where things stand please feel free to schedule time to talk to us by visiting www.bollinwealth.com to schedule time using our convenient Calendly link or call our office at 419-878-3934.

Sources:  Dimensional Fund Advisors, Wall Street Journal, CNN.com