The Government’s Response, and its Implications on your Investments.
While it’s been all over the news the last few days, it’s still very early in the process and, therefore, more information will be coming to light. My goal today is to provide insight and clarity.
Why is the bank failing?
SVB had a pretty classic run on its deposits, just like George Bailey in “It’s a Wonderful Life” – more people demanding their cash than SVB had on hand.
How does this happen?
First, banks only keep a fraction of their deposits on hand for withdrawal; most money is lent out to borrowers or invested.
Second, as a result of the Federal Reserve raising rates from 0.0% to 4.50% over the last year, bond values have dropped. As SVB started selling their bond investments to raise cash to pay depositors, they locked in losses on those bonds which created a downward spiral on their assets.
Clients over the last weeks and months withdrew more and more cash from SVB to either run their own business or to invest in the now higher-yielding government bonds or money market accounts.
The Federal Reserve, Treasury Department, and FDIC announced yesterday that all depositors will have access to their funds whether the value is at the insured $250,000 level or above.
Additionally, the government will make funds available to all eligible institutions to meet the needs of their depositors. This strong and direct response is meant to reassure the public of the integrity of the US banking system.
The government was careful to mention that none of the above will be “borne by the taxpayer” but “by a special assessment on banks”. Additionally, SVB shareholders will not be protected and senior management has been removed.
I’ve been on several investment firms calls over the weekend and this morning. The consensus is that these steps by the government are positive and direct. As I mentioned above, it’s still too early to know completely.
As to the impact on your portfolios, so far in 2023, we have seen much volatility, and the current banking situation is more of that. Your portfolios are very broadly diversified to mitigate risk.
As uncomfortable as the current volatility is, it can create long-term opportunities.
Lastly, the Federal Reserve is nearing the end of its rate hikes. While the impact of those rates will be felt for some time, the stock market is a forward-looking mechanism, and with discipline and focus it will provide solid long-term growth.
Here’s a good article summarizing the SVB situation.
Please feel free to reach out to me to discuss this in more detail.
–David Bunker, Financial Advisor & Fiduciary
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