What is going on?
Late last week, liquidity concerns and a run on deposits resulted in the failure of Silicon Valley Bank – the second biggest banking collapse (measured by assets) after Washington Mutual in 2008. On Friday, SVB was placed under government control, as the Federal Deposit Insurance Corp. took over the bank’s deposits. On Sunday, the New York banking authorities took over control of Signature Bank raising concerns of further contagion.
Upon calls from Congress to intervene, the FDIC, Federal Reserve and US Treasury stepped in – quickly and comprehensively – using authorities that they employed both in 2008 and 2020 giving depositors at SVB and Signature reassurance that they would be able to access their funds.
What has been the response?
Over the weekend the government announced the newly created Bank Term Funding Program – a backstop designed to provide liquidity to other banks that may be facing heavy withdrawals of deposits. This provided reassurance to the market so that no depositor would be exposed to losing money, even amounts exceeding the $250,000 FDIC limit.
How does this impact me?
This is one of the unintended consequences of the economic policy shift. With the Federal Reserve raising interest rates so aggressively over the past 12 months to try and cool inflation, it has resulted in some banks to be underwater on their longer-term bond holdings. This, along with rapid withdrawals from its customers, is what caused the failure in SVB so quickly.
Our belief is that this would not be another Lehman Brothers moment and would be contained to a few unique situations.
With this government funding mechanism now in place, it does not appear that dramatic movements of money between banks are necessary. However, if you are concerned with bank holdings above the FDIC limits ($250,000 per depositor, per insured bank), know that LPL Financial automatically uses a cash sweep program (insured cash account) where uninvested cash is spread among a number of partner banks up to the FDIC limits.
What are we doing?
The events over the past 5 days certainly adds to the headwinds that were already acknowledged coming into 2023 and is why we still have “dry powder” set aside to make opportunistic buys if things get worse. We are also maintaining a shorter, high quality allocation on the bond side of the portfolio.
Thank you for the trust that you have placed in us and please feel free to reach out if you have any questions.
Brown and Company Team