The collapse of Silicon Valley Bank (SVB) is dominating headlines, leaving many people wondering what happened to cause this bank failure. It started with SVB reporting a $1.8 billion loss on the sale of $21 billion of bonds in their fixed income portfolio last Wednesday, March 8. The sale created a loss of confidence among bank depositors and started a “run on the bank.” Customers began withdrawing money in large sums on Thursday, and by lunchtime on Friday, the U.S. government closed SVB’s doors. Sunday, the U.S. Treasury Department, Federal Reserve, and FDIC stepped in and guaranteed all $175 billion of deposits, allowing companies and individuals to access funds and operate normally. In addition, Signature Bank also went into default over the weekend and was taken over by regulators. The Federal Reserve is also backstopping all of Signature’s depositors. The federal government is financing this backstop through fees to the banking system, with no direct costs to U.S. taxpayers. The steps announced over the weekend provide additional protection for individuals and should boost confidence in the American banking system.
The big questions we are hearing from clients are: Is this going to cause contagion? Are my assets safe with Schwab and my bank? What should I do, if anything?
The large money center banks, Bank of America, Wells Fargo, etc., are very well capitalized thanks to ongoing stress tests and the 2008 regulatory mandates to hold more reserves (assets) against deposits. Contagion risk is now substantially reduced with the backstopping of all SVB deposits from the federal government. Regarding Charles Schwab, their capital structure and liquidity are sound, and they operate the firm conservatively to minimize the kind of investment risks that have troubled many other securities firms. Schwab holds ample reserves in excess of their minimum capital requirements.
It’s important to note that Schwab has no direct business relationship with Silicon Valley Bank or Signature Bank, so they do not have exposure to any direct credit risk from either. Also, 80% of their reserves are invested in liquid U.S. government securities. Lastly, Schwab has insurance for their client accounts of up to $150 million per account. This includes $500,000 per account through SIPC and $149,500,000 per account through Lloyd’s. See below.
In addition, your investments at Schwab are held in investors’ names at the broker-dealer. Those are separate and not comingled with assets at Schwab’s Bank, by law. Also, customer assets are not subject to claims by the broker dealer’s creditors. As a further safeguard, Schwab has access to over $80 billion in borrowing capacity with the Federal Home Loan Bank (FHLB), an amount greater than all their uninsured deposits. That helps provide Schwab with significant access to liquidity.
Why did it happen?
Simply put, interest rates rose substantially due to inflation. As inflation increased dramatically during the pandemic, it caused the Federal Reserve to increase short-term rates to slow demand and slow inflation. When short-term interest rates rose, the yield curve inverted (see U.S. Treasury yield curve below). Banks tend to borrow short-term (take deposits) and lend long-term (mortgages and commercial loans). The inverted yield curve creates tighter margins for banks as they need to rely more on fees and less on interest rate spreads. SVB Financial Group’s fixed income holdings were hit hard by the Fed’s aggressive interest rate hikes, and their value dropped dramatically. The bond sale caused investors to panic and try to withdraw their funds.
What is the exposure in your portfolio to SVB?
Very little! Financials are a 19% weight in the equity portion of our portfolios. Financials include diversified companies, like Visa, Mastercard, Berkshire Hathaway, and many insurance companies (health, property, reinsurance). Within financials, banks make up 7% of the stocks, and 4% is considered the large money center, well-reserved banks, while 3% is allocated to regional and smaller banks. Silicon Valley Bank was a four basis points (0.04%) position in the portfolios.
While it’s normal in situations like this to want to take action, the key is to stay invested through the gyrations of the markets. We know staying the course is not easy, but historically it has always paid to stay invested and even add to your positions when possible. We are constantly reviewing the risks and the potential opportunities with your existing positions (rebalancing) and are continually researching outside investments to ensure you are maximizing your return for your given level of risk.
We know events like the Silicon Valley Bank collapse can be unnerving, but we hope this information helps ease your mind. One recommendation we do have for clients is to think about bank diversification by keeping no more than $250,000 on deposit at any one bank. If you have any questions about your investment situation, please don’t hesitate to contact your Resource Consulting Group advisor. We’re here to help.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. This information is for educational purposes only and should not be considered investment advice or an offer of any security for sale.