A Message About the Recent Bank Failures

Tim Obendorf |

Over the past week three banks have closed operations or failed and been taken over by the FDIC: Silvergate Financial, Silicon Valley Bank and Signature Bank.  The largest of these is Silicon Valley Bank with over $200 billion in assets. This is the second largest bank failure in U.S. history after Washington Mutual.  The FDIC shut down Silicon Valley Bank on Friday morning and over the weekend announced that all depositors would be made whole.

These three banks were somewhat unusual in their business operations. Silvergate and Signature banks were focused on the crypto currency industry while Silicon Valley Bank was a key bank to venture capital firms. Silicon Valley Bank’s deposits had grown significantly in the past 2 years and outpaced the bank’s ability to make loans.  The bank invested the deposits in treasury securities that lost value as interest rates rose in the past year.  Over 85% of the bank’s deposits were over FDIC insured limits (compared to 50% for most banks), and as depositors learned of the investment losses they quickly withdrew their funds causing a run on the bank.

We are closely monitoring the market and economic impact of these bank failures. While the failures are likely to create some short-term market volatility, we don’t believe that these failures will have significant long-term market or economic impact. The most immediate market impact has been a change in bond market rate expectations. Over the past several days, bond investors have gone from expecting a 50 basis point rate increase at the next Fed meeting to now entertaining the possibility of no rate increase followed by rate reductions later in the year. Reflecting this change in expectations, the 2-year treasury rate has declined from just over 5.0% to just over 4.0% in the past week.

These events are a reminder of the importance of good risk management.  For your personal finances, diversification is one of the best risk management tools: diversify the banks that you deal with if you have over $250k in cash deposits and diversify the investments in your portfolio.

We want to remind you of the safety and soundness of the financial institutions we deal with. Most of our clients’ assets are custodied at Schwab/TD Ameritrade. The cash in client accounts is generally FDIC insured and additional liquid funds are held in high quality money market funds protected by SIPC insurance. For more information about the financial health of Schwab/TD Ameritrade, you can access their investor relations website here: Investor Relations | About Schwab

As always, please contact us if you have any questions about the recent bank failures, the markets or your personal financial situation.