government securities. However, they failed to hedge the risk against the loss in value of the bonds from rising interest rates. Had SVB properly hedged interest rate risk, they would likely have been protected from significant loss of capital. Instead, when there is a “run on the bank” and the bank was forced to sell those securities to meet demand, they may be selling them at a 15-20% loss to their face value. Signature Bank had relatively significant holdings in cryptocurrencies. Given the anxiety caused by SVB, depositors at Signature were concerned that their excess deposits may not be safe and caused a run at that bank, as well.
With a pace reflecting the lessons learned during the GFC, the US Treasury, Federal Reserve and the FDIC stepped in quickly to provide stability and assurances that FDIC-insured and uninsured deposits would be safe and that the impact to the financial system would be minimized and contained. The Treasury and Federal Reserve have begun to engineer the takeover of the stricken banks by better capitalized banks. The Swiss government has also taken the extraordinary step of allowing UBS to take over Credit Suisse. For savers and investors, higher current yields on short-term instruments like money market funds, certificate of deposits, and even FDIC-insured bank accounts, are very attractive. While
$110 Billion The assets First Citizens BancShares will assume from Silicon Valley Bank in a deal backstopped by U.S. regulators. REUTERS
Making Sense of the Recent Bank Failures Written and prepared by: Robert Janson, CIMA®, AIF® Senior Vice President, Senior Portfolio Manager, Wealth Services
The Federal Reserve has been aggressively raising the Fed Funds rate to reduce inflation as quickly as possible. During past rising interest rate cycles, history has shown that there have been unfortunate but almost inevitable unintended consequences for institutions caught out of position relative to the pace and direction of interest rate increases. In the past, it has been headline-making municipal or corporate bond failures. Or, in the case of the Great Financial Crisis (GFC) in 2008, it was the entire financial system on the brink of failure due to risky residential real estate lending practices. With the recent failure of several high-profile banks, it would be natural to wonder if this is a repeat of the 2008 GFC. While it is still relatively early, it appears that the failed banks made relatively simple mistakes in managing the risks of their obligations to their customers. The two initial bank failures were caused by relatively simple mismanagement of risks. Both Silicon Valley Bank (SVB) (Tech) and Signature Bank (crypto) were exposed to concentrated clientele. SVB held their capital in “safe” US
“The bank waited too long to address its problems and, ironically, the overdue actions it finally took to strengthen its balance sheet sparked the uninsured depositor run that led to the bank’s failure.” Michael Barr, The Federal Reserve’s vice chair for supervision
money market funds are not FDIC-insured, retail money market funds have become more heavily regulated in terms of the underlying investments in the wake of the 2008 GFC. Prime money market funds, which typically have very high initial minimum investments, are not as highly regulated and may present higher potential default risk than the retail version. While the urgency and subject matter are reminiscent of the GFC in 2008, there are key differences between the current situation and the GFC. The tech sector has been under pressure due to rising rates and higher cost of capital to fund continued operations. This has put unique pressure on regional banks. Money center banks seemed to have weathered the storm due to their significant reserves and “too big to fail” status. In 2008, the entire financial system was in jeopardy due to the collapse of the real estate sector which affected virtually every borrower and every financial institution regardless of size. The lesson for bank customers is that the financial strength and decision-making of individual banks still matters when deciding who they deposit their money with
and how much trust they place in their chosen institutions. If you have questions, please contact your Alera Group Advisor.
Personal Finance Quarterly | Spring 2023
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