This article was written by Tom McLean of Advitica Financial Planning.
“You’re thinking of this place all wrong. As if I had the money back in a safe. The money’s not here. Your money’s in Joe’s house…right next to yours. And in the Kennedy house, and Mrs. Macklin’s house, and a hundred others.” These famous words from Frank Capra’s 1946 film It’s a Wonderful Life, echo to the present. In early March the Silicon Valley Bank experienced a situation oddly similar to what George Bailey fought against: a run on the bank.
What happened? Starting Thursday, March 9, The Silicon Valley Bank (SVB) experienced a “run” on their deposits. That means that depositors panicked and too many customers wanted to withdraw their money at the same time. Depositors forgot an important lesson from the Jimmy Stewart Christmas classic: banks don’t keep every dollar of every depositor in their safe and if everyone tries to take out their money at the same time, the bank could go kaput!
The crisis has claimed additional institutions. In March, troubled Credit Suisse Bank was taken over by UBS. Then in early May, JPMorgan Chase bought the failing bank First Republic, which also had a large percentage of customers with balances over FDIC limits.
Thankfully, institutions and policies were put in place to help reduce the danger of bank runs like the one portrayed in It’s a Wonderful Life. In 1933, President Roosevelt signed the Banking Act, which in part established the Federal Deposit Insurance Corporation (FDIC). Today the FDIC insures the cash, savings, checking, CDs, and money market accounts of bank customers up to $250,000 per person, (and $500,000 total for joint accounts).
How did we get to this point? One of the big challenges for the Silicon Valley Bank (SVB) was its customer base of very wealthy individuals and for other banks the percentage of customers with deposits over FDIC limits is causing concerns. The issue has festered for banks that have significant numbers of customers with deposits well in excess of FDIC limits. In these situations, where enormous amounts of cash are not insured and people got a whiff of trouble (in the case, large losses on bond portfolios), panic can ensue. Then, too many people show up trying to get their money out before the bank fails and all their money (in excess of FDIC limits) is lost.
However, it was not just a problem of SVB’s customer base. Another problem was simply the Federal Reserve interest rate increases. SVB and many other banks invest some of the deposits they receive into other customers for things like home, auto, and business loans. With the rest of the cash, they look to find quality debt instruments (bonds). SVB had roughly $23 billion in US Treasuries, but with interest rate increases, the value of their bond portfolio (and bond portfolios of many banks) declined (like many bonds did in 2022). When depositors started making substantial withdrawals, not only did SVB lose customers and it’s deposit base, it suffered significant losses when it had to liquidate its bond portfolio to pay out depositors to satisfy withdrawal demands.
Has this problem been fixed? On March 13, the Federal Reserve, Treasury, FDIC issued a joint statement saying they would pay all the depositors of SVB and Signature Bank, which experienced similar issues – regardless of FDIC limits. While we will leave the “moral hazard” debate for another day, this action was helpful in terms of providing a measure of calm to the overall banking system. However, while one could be forgiven for assuming the FDIC has a new policy on insuring deposits, no one should take this to mean the FDIC will guarantee the accounts and deposits (over FDIC limits) of all other banks that may face similar challenges or “bank runs.”
Note that while SVB was unique in its customer base, many other banks have bond portfolios that have eroded substantially and customers with deposits in excess of FDIC limits that are worried. Another consequence of this crisis was a broad sell-off in regional bank stocks, which as of mid-March helped to nearly eliminate the stock market gains of January and February. While the overall US stock market from mid-March to early May has grown a little over 5% (as represented by the S&P 500 from March 13 through May 5, 2023), as of May 5, 2023, the S&P Regional Banks Select Industry Index was still down a little over 34% since the beginning of the year. If you believe this to some degree represents the collective wisdom of investors, it suggests there are still issues and concerns to address in the banking sector.
What’s next? There are likely to be a few more bank stumbles. My hunch is that the federal government may need to step in with temporary FDIC guarantees to cover more depositors (and stave off further bank runs), potentially enact new legislation to strengthen the system, or take other actions to reduce risks and strengthen the banking system. Additionally, this puts pressure on the Federal Reserve to scale back its plans for interest rate increases. While inflation is important to quell, I am guessing it is less important than preventing (or provoking) a multitude of bank failures. While this problem is being worked through, markets may be volatile.
What Should We Do? It’s a Wonderful Life provides another lesson that is applicable here and that is to stay calm and do not panic. Remember the bank run in the movie and how the depositors almost went to Potter’s bank to get “50 cents on the dollar?” Too many customers making withdrawals from a bank at the same time can put a bank out of business.
With that said, if you have deposits in excess of FDIC limits, strongly consider limiting your deposits to the stated amount of FDIC insurance coverage at any particular institution. FDIC insurance (and NCUA, the credit union equivalent) covers up to $250,000 per person (and $500,000 for joint accounts). IF you have more than that in checking, savings, CDs, or money market accounts at your bank, you may want to reduce what you have to a little under the FDIC/NCUA limit (hopefully you are earning some interest, so give yourself a buffer). To make sure your cash is fully insured, amounts over the FDIC/NCUA limits could be deposited at other FDIC/NCUA insured banks or credit unions.
Additionally, now may be a good time to review what’s in your portfolio. Are you over‐weighted to certain companies or particular industries? Have you implemented more of a gambling (as opposed to investing) strategy – and are you aware of the difference? Do you have enough cash or income available for the withdrawals you will take over the next year? Implementing a sound, prudent strategy can reduce the risk of an overly concentrated portfolio, giving you a better chance to achieve your goals, and help you get a good night’s sleep.
Another consequence of the current climate of uncertainty and market volatility is the potential opportunity to do tax loss harvesting. This can help offset future gains or reduce up to $3,000 of ordinary income each year. Also, a silver lining to the crisis is that there may be opportunities to buy equities if stocks prices decline (and valuations improve).
It is normal to feel anxious when a market storm is upon us. First, just pause and take a breath. It may be a cliché, but remember: this too shall pass. Make sure you have taken the necessary precautions and have structured your financial life to be resilient in the face of the temporary turbulence the market can throw at us. Once you have taken these steps, it will help you get past this moment and in time see a brighter future.
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