I think it’s fair to say that our financial markets experienced an array of emotions over the past 5-10 days. From fear and anxiety to speculation and relief, we saw a little bit of everything. The Federal Reserve and Treasury departments weighed in along the way while a host of European and Domestic banks took actions to stem the fear. This all started last week with the failure of Silicon Valley Bank. The bank provided loans to technology and life-sciences companies and startups. Due to their large influx of cash during 2020 & 2021, Silicon Valley Bank began purchasing tens of billions of dollars of bonds just before the Federal Reserve began raising rates. As rates shot up, the value of those holdings started to lose value. That’s typically fine unless the bank has to sell those bonds to raise deposit limits(depositors start withdrawing). “70% of its $76 billion in outstanding loans was entirely or partly dependent on private or venture capital repayment.” As stocks took a hit in 2022, many startups started burning through cash, which caused them to need to withdraw money from their bank accounts. This caused SVB to see deposits drop for the first time in almost 4 years. It was found that at SVB, only 6% of deposits were insured, meaning most accounts were over the $250k limit. Account holders started to worry about SVB’s financial strength and caused them to begin moving funds to other places, mostly bigger banks. Bank of America reported an inflow of nearly 15 billion of new business, according to Bloomberg News. Since this news broke the FDIC has since stepped in to take control of the bank and protect deposits.
The FDIC was created from the result of the great depression which was caused by bank failures. The FDIC is a federal agency that insures depositors in accounts for up to $250,000. This was designed to help protect account holders in the event of bank failures. In some ways similar to FDIC insurance, brokerage accounts have something called SIPC insurance. SIPC provides protection on securities if a brokerage firm fails. Account holders are insured by the SIPC for up to $500,000 for any securities and cash held by the account in the event the brokerage firm went under.
There is a lot of concern about how the issues with SVB, Signature and First Republic might spread to other similar types of regional banks. There is no certainty that these issues won’t cause more financial institutions with similar funding and underlying investments to fail. However, with the Bank Term Funding Program in place and larger banks stepping in to provide additional resources, any further contagion looks to be contained in the near-term. What is clear in any case is that further regulation on perceived smaller and regional banking entities needs to be addressed swiftly.
The issues abroad with Credit Suisse Bank have been building for some time and appear to be slightly different in nature. Credit Suisse Bank unlike other banks met the capital and liquidity requirements. But the changes in new CEOs and the showing of poor financial reports and guidance has the market concerned. Fortunately, the Swiss National Bank stepped in to support and lend upwards of $50B to protect the assets of its largest investment banking entity.
It’s safe to assume, based on the activity this week, that the impacts of a rapidly rising interest rate environment have hit hard and fast now that it is settling in. The Federal Reserve now sit at a crossroads as they approach their meeting next week. Will they raise another .25 point or step back with a more wait and see stance? Some have even argued that this has been a positive impact on the markets as the Fed will need to pause rate hikes. Today, as we close out a volatile and restless week, we continue to monitor markets and the overall health of the economy.
Happy St. Patricks Day – hang in there!
https://www.cnbc.com/2023/03/16/banks-take-advantage-of-fed-crisis-lending-programs-.html
Christopher E. Wasson, CFP®
President
Mosaic Asset Partners, LLC
1122 Kenilworth Drive, Suite 310
Towson, MD 21204
410.821.0089 fax 410.821.5993
MosaicAssetPartners.com
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The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra IS or Kestra AS. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by Kestra IS or Kestra AS for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.