What is Going on in the Banking Industry?
It’s been an eventful two weeks in the banking world.
On Friday, March 10th, regulators shut down Silicon Valley Bank (SVB) after a run-on deposits and an unsuccessful attempts to shore up its balance sheet. Losses on its portfolio of long maturity bond holdings, in a rising interest environment (interest rates go up, the value of bonds goes down), and venture capital customer base were its demise. Mismanagement played a huge role and is all too often the case in corporate meltdowns.
Over the following weekend, the government shuttered Signature Bank, a niche bank in the crypto currency space that also had a very large share of uninsured customer deposits.
To minimize risk to the financial system and reinforce confidence in the banking system, the Federal Reserve, Department of Treasury and FDIC announced all deposit accounts at SVB and Signature Bank are insured (accounts above the $250,000 FDIC guarantee ceiling). Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks. In theory, taxpayers aren’t on the hook. Essentially the program and government actions are designed to mitigate banks’ balance sheet risk and prevent contagion.
On March 16th, a group of financial institutions agreed to deposit $30 billion in First Republic as a sign of confidence in the US banking system. Participating banks included Bank of America, Citigroup, JPMorgan, Wells Fargo, Goldman Sachs, Morgan Stanley, BNY Mellon, PNC Bank, State Street, Truist and US Bank.
The one large bank outlier, Credit Suisse, announced yesterday a rescue from Swiss competitor UBS and the Swiss National Bank (US Federal Reserve equivalent). A week earlier it disclosed “material weakness” in its 2021 and 2022 financial statements. Credit Suisse in many respects never fully recovered from the 2007-2008 financial crisis; scandals and shoddy risk management have plagued the company the last 15 years.
Of what’s transpired so far, these are not your neighborhood credit unions or banks that have failed. SVB and Signature served a very narrow clientele. But nonetheless fear creates more fear and crisis of confidence (real or perceived), and bank runs are in no one’s interest.
While too early to declare victory, early indications are actions taken thus far are working. The Fed will announce its next move on interest rates on March 22nd as it continues to battle inflation. There’s likely to be heightened volatility around the announcement. Will they pause? 0.25% increase? A 0.50% increase seems unlikely which was a possibility just weeks ago. Inflation is coming down, albeit not as quickly as the Fed would like. But the pace of rate increases, as well as the higher rates, are creating stress in the system, and maintaining the orderly functioning of the financial system is becoming more important.
It can be difficult to sift through all the noise and constant barrage of negative headlines. But this too shall pass. If you have questions or concerns, please contact us. Thank you for being our clients.
Munkeby Kramer Team
The views and opinions expressed are based on current economic and market conditions and are subject to change. There is no guarantee that any statements of future expectations will come to fruition. All information presented is collected from sources believed to be reliable, but may not be guaranteed. United Planners is not affiliated with any other entities referenced.
