On March 13th, SDWMA published an article on the rapid fall of Silicon Valley Bank. In this article, we reviewed the particular set of circumstances that precipitated the fall of SIVB and the mechanics of the run on the bank that occurred. At that time, it was not known if there would be widespread contagion in the banking industry or if this would be contained to a small subset of a few regional banks.
Almost two weeks later, it appears that there are still some unknowns as to how this will play out with smaller regional banks. Larger banks (e.g. JP Morgan, Bank of America, Wells Fargo, etc.), due in part to their regulation by the U.S. Treasury, are well funded and there is no current fear of an event analogous to SIVB that would occur with the large bank cohort.
With the threat of contagion amongst regional banks amplifying in the background, Fed Chair Jerome Powell spoke to the media last week after the Fed announced a 25-point rate hike. In the days leading up to the announcement, there was speculation that the Fed might not hike at all due to the issues in the banking industry. Mr. Powell expressed this concern during the question-and-answer session and stated that the committee is unsure of the longer-term effects of the pressure on the banks. The indication was that the Fed intends to let the data dictate any deviation from its current policy posture. Chairman Powell also mentioned that the full effects of the interest rate hikes may not be seen in the stock market or inflation data that is reported every month. The Fed is committed to bringing down inflation to their 2% target and will continue to use the tools available to them to meet this goal; until there are clear signs of widespread contagion in the banking sector, the Fed appears unwilling to alter their course.
While Fed Chair Powell was speaking to the press, Treasury Secretary Janet Yellen was speaking to Congress about the issues in the banking industry. What is interesting about this dynamic is their differing statements on the safety and security of bank deposits over the $250,000 FDIC limit. When Powell was asked the question, he gave the impression that all depositors’ money was safe at these banks. Yellen, on the other hand, was not willing to state the same in front of Congress. Even more interesting, the very next day (3/23/2023) Yellen seemed to reverse course and in written testimony to a committee in Congress said, “The Treasury used important tools to prevent contagion and they are tools we could use again.”*
So, what does all of this mean for you as an investor? Should I still be worried about regional banks and, more importantly, the regional bank that I do business with? Do I need to only have a relationship with one of the big banks (JP Morgan, Wells Fargo, Citi, Bank of America) or should I spread my money over multiple banks to make sure I stay under the $250,000 FDIC limit? Here is how SDWMA views the current environment:
The Fed and U.S. Treasury now seem to be in lockstep with putting out a similar message that if you have your money with a reputable bank, then they have the tools to make sure your money is safe even over the $250,000 FDIC limit.
Despite the fact that the Fed seems willing to insure deposits over $250,000 in case of a bank failure, it is not law. Hope is not an investment strategy. Our recommendation is to make sure you have cash under the $250,000 limit at each financial institution at a minimum.
The Fed is determined to bring down inflation by continuing its monetary tightening policy. At this point, the Fed does not believe there is contagion among regional banks as a result of the SIVB failure. Even if the Fed does not raise rates any further, they are likely to keep the base rate higher to ensure inflation continues its downward trajectory.
Money Markets, short-term Treasuries, and even short-term CDs are potential places to store your money in this environment.
Bank headlines will not go away. Credit Suisse was purchased by UBS in Switzerland to help stabilize that country and Europe’s banking issues. First Republic received help from larger banks to try and stabilize its deposit base amid a sizeable flight of its deposits to larger institutions. Commercial Real Estate debt exposure is something that is just beginning to be talked about, but potentially looms as a significant headwind for regional banks that issue some 70% of CRE loans in the U.S.
If you have additional questions, please don’t hesitate to reach out to your trusted Schneider Downs Wealth Management Advisor.
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Schneider Downs Wealth Management Advisors, LP (SDWMA) is a registered investment adviser with the U.S. Securities and Exchange Commission (SEC). SDWMA provides fee-based investment management services and financial planning services, along with fee-based retirement advisory and consulting services. Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice. Registration with the SEC does not imply any level of skill or training.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.