Banking Crisis: Is My Money Safe?

Given the banking system events of recent weeks, I wanted to share some perspective to help you cut through the noise and make smart, informed decisions. It is vitally important to separate fact from fiction and hyperbole. It is also important to understand the types of accounts you own and the real risks you are taking. In this post, I took a “FAQ” style approach to answer some common questions I have received over the past few days. As always, we are happy to discuss your unique situation in more detail.

What happened over the weekend with Credit Suisse and UBS?

Credit Suisse has been struggling for over a decade with poor strategies and bad risk management. From 2013 to the beginning of 2022, the stock declined from 30CHF to 10CHF, losing two-thirds of its value before the recent crisis even started. The Credit Suisse bank was well capitalized, but because of prior missteps, clients started to pull funds from Credit Suisse over the last few weeks. Ultimately, these outflows were more than the bank could withstand. As we mentioned in our note on SVB, no bank can survive a bank run. On Sunday, UBS, the other major Swiss Bank, agreed to buy Credit Suisse to prevent the bank from failing during the week while markets were open.

What really happened at Silicon Valley Bank (SVB)?

SVB banked start-ups and associated venture capital firms almost exclusively. Those firms relied on capital raises to fund their activities for the last decade. When markets changed last year, they begin to draw down their cash at record levels, eventually leading to challenges for SVB. The bank did not manage its balance sheet well, forcing it to sell securities at losses to fund the asset drawdowns. On March 8th and 9th, leaders in the venture industry asked their portfolio companies to withdraw funds from SVB, which created a “run on the bank” liquidity crisis that was probably unnecessary.

The banking industry at large is more diversified and better managed. All financial services firms struggle during periods of rising rates and yield curve inversion (when long-term rates lower than short-term rates). However, most have been managing their balance sheets prudently over the last year to avoid significant capital issues.

Did the U.S. Government’s actions at Silicon Valley Bank “bail-out” irresponsible Venture Capitalist and technology firms?

In our view, our allowing depositors to take losses at Silicon Valley bank to “enforce market discipline” would have resulted in the end of the U.S. banking system as we know it. Everyone who uses regional and community banks would have moved all deposits to the largest four banks in the U.S. to avoid even the potential of future losses. The implicit assumption is that the biggest U.S. banks are “too big to fail.” So regardless of your views of the silicon valley technology community, allowing the depositors to lose money would have likely created substantial pain for families and small businesses nationwide.

Is my money at my bank safe?

In our opinion, yes. Prior to the events of the last few weeks, the Federal Deposit Insurance Corp (FDIC) guaranteed bank deposits in the U.S. up to $250,000. Last weekend, the FDIC and the Fed announced a temporary lending facility that banks could access over the next year in the if customers began to demand more cash than usual. That new facility should prevent a bank from going out of business absent a complete loss of confidence from customers and subsequent “bank run”.  Given the action the Fed and FDIC took for Silicon Valley Bank, it would seem they are willing to ensure depositors are made whole in any scenario involving a failing bank.

What about accounts with more than $250,000?

First, it is critical to understand the types of accounts you own. There are differences between brokerages and banks.

For bank accounts like checking, savings accounts and CDs; we believe the recent actions by federal regulators imply that the U.S. government will ensure depositors do not lose money in the event of a bank failure. However, there is no guarantee for deposits over $250,000 in one bank. Therefore, it would be wise to use multiple banks to remain below the thresholds. Some larger banks may even offer this automatically because they have many legal entities.

For brokerage accounts like retirement accounts and stock trading accounts, assets should be segregated from the brokerage firm’s own funds. If you are unsure if your funds are segregated from the broker’s accounts properly, verify these practices with your brokerage firm. Like banks, brokers have federal insurance through the Securities Investor Protection Corporation (SIPC). That means assets are protected up to $500,000. In practice, because correctly structured brokerage accounts are not subject to creditors, you should not lose money in the event a broker fails.

In our view, your larger accounts are also safe. Ideally, we recommend keeping individual bank deposits below the FDIC thresholds. Additional assets should be kept at a brokerage firm or custodian where they are fully protected in the event of a collapse.

What if I need to keep more than $250,000 in cash at a bank to run my business or for some other reason?

Again, because of the comments from the FDIC and Federal Reserve over the past week, we don’t believe you need to pull deposits out of smaller banks. That doesn’t mean you should do nothing. Even if your deposits are backed by the government, a bank failure would likely cause significant short-term business disruption if you were involved. Our recommendation would be to examine the financial strength of your bank and make sure you feel comfortable with their capital levels and business practices.

Why don’t banks just keep all of my money on hand when I deposit it?

Remember the economic concept of “no free lunch?” Consider that for a minute and then think about your “free” checking, savings, or money market account. The bank provides transaction services to you and gives you digital access to your account. Bank owners also must earn a profit or they would not exist. Banks earn money by lending short term deposits out to others at higher interest rates than they pay depositors. They keep the difference between what they pay you, the depositor, and what they charge the borrower to cover costs. Well-run banks manage the risks of depositors needing their cash with their loan payments to ensure everyone can access cash when needed. Regulators also have rules that cover lending levels and activity and should be monitoring the bank’s activity.

Are banks getting “bailed out” again, like 2008?

In the U.S., so far, no shareholders or bondholders of the failed organizations have received any money. The depositors at Silicon Valley Bank and Signature Bank received money from the deposit insurance fund, but the owners received nothing. So no U.S. bailouts yet.

In Switzerland, UBS bought Credit Suisse and some equity and bond holders will receive payments. The Swiss government is providing substantial assistance to UBS for them to close the transaction. So you can argue this is a bailout. However, most equity holders will lose substantially all of their investment and many bond holders will lose money as well, so I don’t view this as a “win” for them. It certainly won’t encourage risk taking like Credit Suisse’s activities going forward.

Will bank runs continue?

Digital transactions and social media are causing banks to lose deposits faster than many though possible. A few depositors get concerned and they share their concerns quickly with others. Everyone can begin acting almost immediately. The reality is that no bank in the world can withstand a complete loss of confidence and short-term withdrawals of more than half of its deposits. It’s possible that other banks that have been in the news, like First Republic, may fail as well. Success or failure will be determined by the confidence institutions instill in their clients.

It’s also worth noting that the current additional assistance that the Federal Reserve and FDIC are providing expires next year. If interest rates move significantly lower, this will be fine. If not, the program will likely need to be altered to ensure some smaller banks remain liquid. So expect more developments in this area over the coming weeks