By Steven M. Rogé, MBA, CFP®, AIF®
Chief Investment Officer
This time last week Silicon Valley Bank (SVB) was the 14th largest banking institution in America with a market cap well over $10 billion. SVB was widely considered the darling of banks over the past decade with deposit growth surpassing nearly every other regional bank. SVB benefited from loose monetary policies and wild speculation within the venture capital markets. With Silicon Valley being the epicenter of start-ups, SVB was there as the main banking beneficiary.
Fast forward to this past Thursday and reports of cracks within SVB began to form and by Friday SVB was insolvent. Individual banking clients of SVB and businesses alike were shell shocked. Seemingly with no advanced notice their “safe” cash was locked-up.
How could have this happened?
- SVB was one of the first victims of the Federal Reserves increasing interest rate policy. As interest rates have increased, investors have changed their attitude on where to invest.
- Venture capital investors have been more selective on funding start-ups. This meant that the very same businesses that propelled SVB to great heights would have continuous cash drain out of the bank.
- Bank rates are low, so many customers have moved assets to higher yielding money market funds.
- While assets moved out of SVB, they need to sell Treasury bonds (to cover withdrawals) at a loss as interest rates are higher than when they purchased these securities.
We have been watching news sources to get as much information as possible to assess the impact on the rest of the banking system. However, government agencies worked swiftly, auctioning off the assets of SVB and taking over the next shoe to drop – Signature Bank – another beneficiary of speculative investment in cryptocurrency. They also announced unlimited backing of deposits at FDIC participating banks. Yesterday, the government announced actions that are likely to have nipped the banking crisis in the bud for now and perhaps in the future.
What should you know?
- While bank deposits are now effectively backed by the government, it may still be wise to assess your FDIC insurance coverage. We have long advocated that these limits be taken seriously. Excess cash above and beyond these limits should be deposited at other banking institutions or deposited into your brokerage account (with higher SIPC insurance limits).
- While the stock market assesses the impact on all financial institutions, we believe Charles Schwab is financially sound. Schwab has limited exposure to the most speculative areas of the economy. They also have a huge money market business, so while deposits have left their bank cash sweep business, it has just moved into their more profitable money market business.
- Your assets at Schwab are covered by The Securities Investor Corporation (SIPC) up to $500,000 (including $250K in cash). Schwab also carries excess SIPC coverage up to $149,500,000 (including $900K in cash) per client account.
We remain vigilant in assessing how this may affect your portfolio. We have diversification among different assets classes including stocks, bonds, commodities, real estate, infrastructure, gold bullion, and cash (money market funds). Our client portfolios also have a record amount of money market funds which gives us some dry powder to jump on any investment opportunities that may arise.
If you have any questions or would like to discuss this topic further, please reach out to us at 631-218-0077 or at info@rwroge.com.
You can also review todays press release from Charles Schwab about their financial stability as a publicly traded company by clicking here.
If you or someone you know would like to schedule a complimentary discovery call with our team of knowledgeable CERTIFIED FINANCIAL PLANNERS™ (CFP®), please contact us at 631.218.0077 or info@rwroge.com or click here. We would be happy to discuss how our process can help you Plan, Achieve, and Live® the life you want.
R.W. Rogé & Company, Inc. is a fee-only financial planning and wealth management firm serving clients locally and virtually across the country, with Long Island, New York, Beverly, Massachusetts, and Naples, Florida office locations. We help clients Plan, Achieve, and Live® the life they want since 1986. To learn more about how we do this, click here.
