Bank Stocks in the News

March 13, 2023

As you’ve likely seen in headlines recently, there have been some unusual events impacting three regional banks over the past several days. Here we will lay out what is happening, why so, what protections are in place, and how this could impact you as an investor.

[Short answer: extraordinarily minimal risk of impact]

  • Silicon Valley Bank is a unique bank that works primarily with tech startups. These startups are funded by venture capital dollars, which are deposited for use of the startup companies.  A large withdrawal last Wednesday strained their capital reserves, which led to the tightly-knit community of investors to be concerned and thus a mass-withdrawal, or bank run.
  • NY based Signature Bank, which had been struggling with their relationship to crypto banking, also failed over the weekend.
  • Silvergate Bank made bad bets on crypto-currency and simply failed. No government intervention, and all depositors were made whole (at the expense of Silvergate shareholders).

The federal government (the Federal Reserve, FDIC and Treasury) have taken control of SVB and Signature.  ALL depositors will be made whole and have access to all funds today.

Why is this happening?

Like many banks, SVB & Signature hold their capital reserves in US Treasuries. Until recently most Treasuries yielded ~1%.  As the Fed raised interest rates over the past 12 months the market value of the 1% Treasuries traded below their full value at maturity.  When the large SVB withdrawal was initiated SVB was forced to sell some of these Treasuries below their maturity value, triggering a loss for the bank and the need for additional capital.

  • To avoid this same risk spreading to other banks the Federal Reserve has created a new facility called the Bank Term Funding Program (BTFP) that will offer loans to banks. 
  • The Fed will accept Treasuries, Agency MBS and other qualifying securities as collateral against these loans.
  • Important to note – the collateral will be accepted and valued at par, ignoring the mark-to market losses the banks are sitting on.
  • BTFP will be backed by money from the Treasury’s Exchange Stabilization Fund – $25 billion, an amount large enough to cover ALL UNINSURED DEPOSITS at US banks.

Regulatory Guardrails

In addition to the new BTFP referenced above, the US banking system is shored up by federally backed insurance programs such as FDIC for banks, NCUA for credit unions and SIPC for investment custodians such as Schwab, Fidelity & Vanguard.  We offer links below for more information on these programs.

Of note, this is not a bailout by the government.  All banks pay insurance premiums for FDIC coverage so the money used to cover the deposits are paid by banks, not the Fed or Treasury.

What about Charles Schwab?

Schwab’s banking deposits are over 80% covered by FDIC insurance (vs. 3% for SVB). Their capital reserves are well in excess of regulatory requirements, and are 80% comprised of securities backed by the US Treasury and various government agencies. Finally, they have access to over $80 billion in borrowing capacity with the Federal Home Loan Bank (FHLB). You can read more here.

Looking Forward

In an odd turn of events this could cause the Fed to slow, or reduce, its anticipated final rate increases. After all, their aggressive rate increases are what led to some of the short-term damage to the capital reserves of banks owning older Treasury notes. It’s too soon to predict anything here, but this situation is certainly not supportive of additional rate increases.

Bottom Line

Carry on. This is not something to lose sleep over, especially with the federal government stepping in so clearly and forcefully to prevent this scenario from impacting other US banks.

If you care to dig deeper, here are some resources to help.

FDIC Press Release
Schwab Liquidity

Regulatory Resources

Banks: FDIC
Credit Unions: NCUA & NCUA protection
Custodians: SIPC

This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions are as of March 13, 2023, and may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted, and actual results may vary.

All investing involves risk, including the risk of loss. Investment risk exists with equity, fixed income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided. Investors should fully understand the risks associated with any investment prior to investing.