March 14, 2023
Silicon Valley Bank Commentary
The Silicon Valley Bank failure that occurred late last week caused a flurry of news articles and speculation that have driven down bank stocks across the board. Investors may be concerned about the implications, but it’s important to understand the facts and how they may or may not affect individual investors and more importantly, Rockbridge clients.
Andrew Ross Sorkin of the New York Times summed up the current situation this way in the opening paragraph of his daily newsletter:
“Federal regulators yesterday unveiled the most sweeping backstop for the U.S. banking system since the 2008 crisis, to limit carnage from the collapse of Silicon Valley Bank. The decision has shaken up global markets, with investors selling bank stocks and betting that the Fed would hold off on further interest rate rises.”
There will be much discussion about how it could have been prevented, who is to blame, who should suffer the consequences, and how these situations can be prevented in the future. That discussion can wait. For now, let’s consider what investors should do today:
- Review your direct exposure to banks and take steps to reduce deposits or cash holdings to FDIC insured levels ($250,000 per customer at any one bank). The average deposit balance at SVB was something like $1.4 million meaning there were billions of dollars of uninsured deposits in excess of the FDIC limits. It’s important to remember that checking/savings accounts and Certificates of Deposit are insured by the Federal Deposit Insurance Corporation up to $250,000 per depositor.
- Evaluate your overall risk exposure along with cash and liquidity needs. Consider the potential for job loss, business emergency, or family emergency and ensure that you have enough financial flexibility to avoid selling assets in a down market, when others may be panicking.
- Understand that the Federal Reserve and Treasury Department have already taken steps to provide assurance that this isolated incident will not spread to other banks. The Federal Reserve created the Bank Term Funding Program (BTFP) to provide liquidity to banks and they are using this program as it was intended.
- Maintain perspective of how banks operate. Banks generally use a large portion of depositors’ cash to fund loans to borrowers, or invest in bonds. They rarely have enough cash on hand to return depositors’ balances all at once if there is a run on the bank due to a loss of confidence. Over time, borrowers will repay loans and bonds will mature. In 2008, the concerns stemmed from homeowners defaulting on mortgage payments. This time the concern seems to stem not from the loan portfolio, but from the realized (and/or unrealized) loss on bond investments caused by rising interest rates hurting bond prices.
- Keep in mind that investors have a long time horizon; a diversified portfolio of stocks and bonds will reward investors as the economy grows and prospers over the long-term. Investors own actual shares in company stock and government/corporate bonds that will weather this storm.
- Leave speculation to the speculators. This might be a time to sell bank stocks short, before they go down more OR it may be the time to buy bank stocks at a discount, before the market snaps back. Getting that bet right could be lucrative. Getting it wrong could be a financial disaster. Either way, it’s a speculative bet that we can’t recommend taking.
What about Rockbridge clients with assets held at Charles Schwab?
Schwab Bank is a separate legal entity from the Charles Schwab Brokerage business (where your investment assets are held). Each is thoroughly and separately regulated with no real commingling of assets. It’s also important to remember that brokerage accounts are insured up to $500k by SIPC (covering up to $250k in cash). Schwab Bank’s business is fundamentally different from most retail banks, and less exposed to panicky cash withdrawals of balances above the “uninsured” threshold of $250k (which represents a small percentage of its account holders). The bank is also exceptionally well-capitalized, with a tier 1 Equity ratio of more than 25% (Banks are considered well-capitalized at just an 8% ratio). That means the bank has significant capital and external lending facilities available (even before today’s lending measures) before needing to take losses on their investment portfolio.
Charles Schwab investors and Schwab banking customers should feel confident in Schwab’s financial position and protection measures in place. We feel as though Schwab’s global presence and diversification, as compared to Silicon Valley Bank’s hyper-focus on tech-start up funding and banking, puts them in a significantly more secure position. We continue to recommend that clients maintain appropriate emergency funds, but otherwise stay fully invested in a diversified portfolio. If you have any specific questions, don’t hesitate to ask.
(Photo credit: Tony Webster)