The collapse of Silicon Valley Bank last week has understandably caused some concern among investors over the past few days. The collapse of Silicon Valley Bank marks the 2nd largest bank failure in US history (Washington Mutual was the largest), and the first large bank failure since the financial crisis of 2008/2009. The turmoil of the 08-09 financial crisis is still fresh in some investors’ minds, so when a large regional bank like Silicon Valley suddenly fails, a natural reaction is to look around and see who might be next. However, the failure of Silicon Valley Bank and the failure of Washington Mutual were due to completely different circumstances. Listed below is a summary of what is going on and some important points about the safety of our clients’ personal investments.
First, a quick and oversimplified review of how banks make money. Depositors (e.g. you, me, companies) need a safe place to put cash. Banks collect this cash from depositors, keep some of it available for withdrawals, and invest the rest in longer-term bonds. They collect more interest on these bonds than they pay to their depositors and that is how they make a profit.
Why did Silicon Valley Bank collapse?
The bank’s depositors were heavily concentrated in the tech industry, with its cash deposits booming along with the tech industry during COVID. However, as the tech industry has slowed down over the past year, the money that was previously deposited was now being withdrawn in large amounts. At the same time, Silicon Valley Bank suffered losses in the bonds they owned due to rising interest rates. Silicon Valley Bank needed cash to meet withdrawal demand, but couldn’t find it quickly enough, so they were forced to sell the bonds they owned at a loss. This led other depositors to be concerned and eventually to a “run on the bank”. That is when the FDIC stepped in and took over.
Are more banks going to fail? While it is always possible that more banks may fail, the conditions that caused Silicon Valley Bank to fail (lack of diversification of clients) are not shared by the banking industry as a whole. Also, last Sunday the Federal Reserve, FDIC, and the Treasury Department put additional safeguards in place to provide support and confidence for the banking system as a whole during this time of stress.
Should I adjust my investment portfolio?
We know that markets don’t like uncertainty, so we are not surprised to see volatility across the bond and stock markets. At the same time, we don't recommend knee-jerk reactions to your investment portfolio. The portfolios we design for our clients are diversified and allocated with your level of risk tolerance and goals in mind. We expect these bumps in the road to happen along the way. Sticking within your investment plan is still the best option.
It is important to note that our clients’ assets are predominantly held at Schwab Institutional in their name (or the name of their trust) and are not commingled with any assets of Schwab Bank. Schwab Institutional and Schwab Bank are completely different divisions of the Charles Schwab Corporation (How Assets Are Protected at Schwab). In the unlikely event that Schwab Bank was to fail, our clients’ accounts and money would still be accessible. The value of your accounts will increase or decrease based on the performance of your investments regardless of what happens at Schwab Bank. Also worth noting, money is still flowing into Schwab Bank at an average rate of $2 billion per day in March, including last Thursday and Friday. This is generally a good indicator of financial health and confidence.
As usual, if you have any questions or concerns about your investments or financial plan, please don’t hesitate to reach out to your advisor.
RYAN M. VOGEL, CFP® is the CHIEF PLANNING OFFICER, PARTNER at Novi Wealth
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