The recent bank failures have had a significant impact on the United States financial system, and Berman Hopkins CPAs & Associates would like to address what has emerged within the banking industry. Three bank failures have occurred: Silvergate Bank, Signature Bank, and Silicon Valley Bank, the 16th largest bank in the United States. The economic collapse of Silicon Valley Bank was the biggest bank failure since 2008 and the second largest in U.S. history. Though these failures occurred only days apart, the imminent collapses were unrelated. However, the failures of these banks have caused significant anxiety throughout the financial system.
The Downfall of Silicon Valley Bank
Silicon Valley Bank, a financial institution with $209 billion in assets, made several critical mistakes, which caused U.S. regulators to close the bank after depositors rushed to withdraw their funds.
The troubled establishment had limited diversification of its customer base, which is a recipe for failure for any institution, large or small.
It invested heavily in longer-term U.S. treasury bonds. Typically, this is a safe asset. However, the value of these bonds has declined as the Federal Reserve swiftly increased rates in recent months.
It banked highly concentrated and risky industries, such as startup venture capital, technology businesses, and cryptocurrency companies. It became dependent on venture capitalists' ability to raise funds, which were limited due to continued interest rate increases.
There was an asset/liability mismatch, causing a liquidity issue as its deposits ran off. When liquidity got tight, it had to sell underwater securities for a loss of $1.8 billion. Along with the inability to acquire capital, this caused the spiraling downfall.
Full Access to Money
Typically, federal insurers cover deposits up to $250,000 per depositor, per insured bank, for each account ownership category. On March 13, 2023, President Biden vowed that depositors in these failed banks would receive full access to their money and promised to take other steps to protect the nation’s banking system. Additionally, the sources of safeguarding the deposits would come from bank regulators rather than the taxpayers. Therefore, to prevent further damage to the financial system, the Treasury, Federal Reserve, and FDIC announced that FDIC would cover all deposits at Silvergate Bank, Signature Bank, and Silicon Valley Bank. The FDIC can utilize funds to protect uninsured, excess deposits if the Treasury Secretary and two-thirds of the Federal Reserve and FDIC boards determine a “systemic risk” to the financial system, a strategy the federal officials pursued.
Depositors and others in the financial sector heaved a sigh of relief, but not before stocks slid on Wall Street, with some banking institutions losing more than half their market cap in one day. On Wednesday, March 22, 2023, the Federal Reserve raised the target federal funds rate by a modest 0.25 percentage points after two weeks of turmoil in the financial industry. The federal funds rate is the interest rate at which banks borrow and lend to one another overnight. It also influences consumers’ borrowing costs, either directly or indirectly, including credit card, mortgage, and auto loan rates.
Banking Industry Highlights
The following are some general facts and observations about the banking industry:
It is a source of financial strength.
In the FDIC's most recent assessment of the nation's banking industry only days ago, Chairman Marty Gruenberg described it as "well-capitalized and highly liquid."
The FDIC Fund stood at an all-time high of $124.5 billion as of June 2022. The FDIC has a $100 billion line of credit with the United States Treasury, which must be repaid by the banking industry if used by law.
Over 99 percent of the nation's banks are "highly capitalized," well above the most rigorous regulatory standards.
Choosing where to bank matters. Just because a financial institution is large does not indicate it operates or manages risk accurately. Unlike Silicon Valley Bank and the other banks that came to a recent demise, local and regional banks serve businesses and individuals within the community. By nature, community banks do not take on the level of exposure the failed financial institutions chose. Typically, these banks are well-capitalized, surpass regulatory thresholds, provide strong liquidity to support depositors, and have limited past-due or non-performing loans. And remember, while these are unprecedented times, banks have managed through difficult periods in the past.
Examine Your Investment Policies
The fallout from recent bank collapses can seem alarming and problematic. To ensure your business, money, and investments remain safe now and, in the future, do your due diligence to gain a better understanding of the industry and ask the right questions when seeking advice.
For companies holding fixed-income securities, now is an opportune time to examine investment policies and practices:
Review Investment Holdings: Are asset allocations appropriate in a volatile economy with rapidly rising interest rates? Asset allocation funds help reduce volatility by spreading assets to several types of investments, including equity securities, bonds, and other fixed-income securities. Although diversification does not eliminate risk, it may help reduce losses during stock market fluctuations.
Review Investment Policies: What are long-range policies relating to investments? Do existing policies require a periodic review of holdings or reallocating as the economy changes? Do the policies speak to the issue of how much liquid capital can be concentrated in one financial institution?
Review Diversification Strategies: Reallocation and diversification may provide added levels of protection and risk aversion in potentially volatile economic situations.
Consider Cash Needs When Entering into Long-term Positions: Investment policies should include benchmarks for maintaining liquidity to help meet short-term needs.
Here to Help
If you have questions or concerns about your company’s investment policies, liquidity strategies, and banking relationships, Berman Hopkins can help. We are dedicated to providing you with direct access to the firm’s decision-makers as we work together to bring valuable and timely solutions. Contact us to let us know how we can best support you.