Maintaining Balance In The Wake Of Bank Failure

Benjamin Haas |

Life’s all about balance. We need balance to stand up straight and move – or we become sedentary. We need balanced diets to stay healthy and fit – or our bodies can malfunction. We need to balance our desire for late night fun with the need for a good night’s sleep – or we risk becoming unproductive the next day. Banks need to balance deposits and loans – or they risk failure. And we need to balance our worries with optimism and education – or we risk either living in fear all the time and then making rash decisions because of it. 

I never want to downplay the importance of understanding what’s happening in the word around us. Silicon Valley Bank’s failure is major news1. If there’s one thing our financial systems need more than anything, it’s solvent banks and a belief that “our money is safe.” We know there are risks with stocks – we expect losses from time to time. We also know that even bond values can go down as interest rates change (a harsh reminder we received in 20222). But one thing needs to be constant, and that’s the ability to safely stow our money in banks for future use – risk free.  

That confidence was shaken this weekend. Customers of the 16th largest bank3 needed to be bailed out by FDIC insurance5 after a “run on the bank” took place over several days, not unlike in the plot of It’s A Wonderful Life from 80 years ago.4 When customers want to withdraw their money at the same time based on any number of fears (in this case the tech boom had faded in Silicon Valley and funding was depleted) then faith in banking is lost, and failure can be a self-fulfilling prophecy. The bank sold assets at a loss to cover withdraws and there weren’t deposits to replace them. Without balance – failure.  

I do not want others to ignore potential problems or warning signals caused by this event. But I also don’t want our clients to live in fear or worry about their life savings or investments – or big banks. We need to balance the fear and worry with a little bit of education and perspective, and indeed a little hope and optimism. Without getting too deep into the weeds on regulatory requirements (and the difference between national and region banks) here are a couple things I, personally found helpful as it relates to the events surrounding Silicon Valley Bank and where we go from here: 

  1. Our system works. Insurances exist for a reason. Deposits were backed5. This means the Fed, FDIC, and US Treasury proved that people will be made whole and that helps re-instill confidence and prevents a wider panic.  

  1. Those most at risk are those that knowingly took risk – investors and stakeholders in the bank, bank executives and the management team of SVB.  

  1. The make-up of the banks now reported to be in trouble are different than your “typical” bank. These banks are not like Wells Fargo, JP Morgan, BNY Mellon, etc. 

    • Silicon Valley Bank had a narrow focus on technology companies, specifically startup tech companies, venture capitalist firms that fund startups, etc. 

    • Silvergate6 – a central lender to the crypto industry, is one of two main banks for crypto companies (Signature Bank, noted below, being the other one) 

    • Signature Bank7 – expanded in 2018 with focus on crypto industry by creating 24/7 payments network for crypto clients which helped accelerate deposit growth 

  2. There will be scrutiny on the management of these banks. But zooming out, you could also point a finger back to Covid again. This could be seen as another domino from the monetary and policy decisions surrounding the pandemic. When the Federal Reserve took interest rates to zero, flooded the system with liquidity and then Congress approved trillions in stimulus funds on top of all that, inflation was going to happen – and it did in a big way. In retrospect, perhaps the Fed was too slow to raise rates again, having to spike in 2022 to combat inflation and it appears that put pressure on the balance sheets of certain smaller banks with exposure to the more speculative asset classes of the Covid pandemic – crypto and tech startups. 

    • The silver lining could be that new found “caution” around lending as a fallout of this reality could in itself be deflationary. Time will tell… 

 

Hope is not a strategy and I’m not suggesting that we just hope and pray for the best. But for now, I believe the stock and bond markets are telling us that while this is a situation worth monitoring, there is no current cascading affect, contagion, or hidden skeletons in the closet that warrants a major shift in our plans or strategy.   

My hope for you, our clients is the following: 

  1. If you have questions, please reach out! We want you to be informed JUST enough to balance understanding without generating unnecessary fear. 

  1. Let us do the worrying. Let us filter the information. Let us provide the advice and direction. We are paid to take some of this burden OFF you so instead of reading and analyzing and assessing on your own, you can simply follow our lead.  We promise to let you know if and when you should be doing something different 

  1. Don’t let your mind wander too far.  

 

Whether its food, sleep, or the emotional tug-of-wars we have every day – it’s not easy to maintain balance when the world around us feels crazy. Let us know how we can help. 

 

 

  1. https://www.cnbc.com/2023/03/10/silicon-valley-bank-is-shut-down-by-regulators-fdic-to-protect-insured-deposits.html 

  1. https://www.cnbc.com/2023/01/07/2022-was-the-worst-ever-year-for-us-bonds-how-to-position-for-2023.html  

  1. https://www.forbes.com/sites/conormurray/2023/03/13/what-to-know-about-silicon-valley-banks-collapse-the-biggest-bank-failure-since-2008/?sh=7ce885c34c27 

  1. https://en.wikipedia.org/wiki/It%27s_a_Wonderful_Life  

  1. https://www.cnbc.com/2023/03/12/regulators-unveil-plan-to-stem-damage-from-svb-collapse.html?utm_campaign=mb&utm_medium=newsletter&utm_source=morning_brew  

  1. https://www.cnbc.com/2023/03/08/silvergate-shutting-down-operations-and-liquidating-bank.html  

  1. https://www.cnbc.com/2023/03/13/signature-bank-third-biggest-bank-failure-in-us-history.html  

 

 

 

Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor. Great Valley Advisor Group and Haas Financial Group are separate entities. This is not intended to be used as tax or legal advice. Please consult a tax or legal professional for specific information and advice. Tracking # T005497