Bank Failures – How It Happened and What It Means For Investors
Over the last few weeks, we saw several bank failures. The collapse of Silicon Valley Bank was only the first such failure. A lot has happened since then, so we thought a short update would be in order. Volatility in the banking industry almost always means volatility in the markets, and there has been a lot of both so far.
Three Bank Failures in One Week
Silicon Valley Bank (SVB) was seized by federal regulators on Friday, March 10. It was not the first bank collapse this month, nor was it the last. Two days earlier, Silvergate Bank, another California institution, announced it would liquidate its assets and wind down operations. Two days after the SVB collapse, regulators closed a third bank. This was Signature Bank, based out of New York.
All three bank failures were sparked by bank runs in the days before their collapse. All three banks had made ill-timed investments in recent years. For Silvergate and SVB, this was in the form of overexposure to government bonds, which dropped in value as interest rates skyrocketed. For Signature – and Silvergate, too – the trouble really started when the price of bitcoin and other cryptocurrencies plummeted in 2022.
Over the weekend, investors and many companies with their deposits on hold, waited with bated breath to see what the government’s response to these bank failures would be. Everyone still remembers what happened in 2008. Back then, panic spread across the entire banking industry and from there to the overall economy. Unfortunately, some of that panic came because the government stepped in and then didn’t, which left investors with uncertainty.
“Contagion” is a very real thing when it comes to banking, and no one wants a repeat of the financial crisis. In recent days, other banks that have not collapsed, have strong balance sheets, and are not necessarily in danger, still saw their stock prices fall dramatically. This partly came due to how connected individual stocks are with index fund trading and partly because investors run if they catch even a whiff of financial instability.
The Government Reaction
As it turns out, Washington moved swiftly and decisively in an attempt to stamp out uncertainty. On March 12, the Federal Reserve created the Bank Term Funding Program. This program will provide emergency loans for up to one year to safeguard 100% of deposits to any bank or credit union that needs it. (Normally, only the first $250,000 of an account’s deposits were insured against loss. Most of the organizations doing business with these three banks stood to lose much, much more than that.) In return, these banks must put up any Treasuries or highly rated debt they own as collateral and pay a modest interest rate.
The idea here is to stabilize all the regional banks around the country and prevent bank failures by assuring customers their money is safe. Furthermore, the program is designed to make it easier for banks to get needed liquidity instead of selling their assets off in a fire sale.
A couple of things to note about this program:
First, this is not a “bank bailout” in the traditional sense. The banks themselves are not being saved or spun off to other, larger banks. Furthermore, both bond- and stockholders of these banks will still likely experience a loss in the short term. This program is designed solely to protect depositors. (Of course, the exact definition of a “bailout,” and whether one is justified or not, is a topic best left to politicians.)
Second, to pay for all this, the government will draw from the Deposit Insurance Fund. This fund comes from quarterly fees levied on financial institutions. Public taxes will not be used.
So, what does all this mean for the future? What does it mean for us?
There are several things we as investors need to be aware of:
1. More volatility.
The government’s actions temporarily stabilized the markets early in the week. But the major indices dropped again on Wednesday, March 15, when an important European bank was found to be in financial difficulty, albeit for different reasons, and has been in decline long before these failings. In the short term, investors will be hypersensitive to any banking instability. That means volatility is still very much in the cards.
Right now, politicians and pundits on both sides of the aisle are trying to turn this issue into the latest political football. As investors, we must avoid getting caught up in all that and remain focused on keeping to our investment strategy.
3. Interest rates.
There’s a lot of chatter on Wall Street right now that this issue will cause the Federal Reserve to delay more interest rate hikes. If that happens, it’s quite possible the markets will go up. But we do not make guesses about which way the markets will go or what the Fed will do. In fact, you can make an argument that doing so is partly why SVB got into so much trouble.
So, that’s where things stand right now. There’s a lot we at Hennion & Walsh will be monitoring in the coming weeks, including any further potential bank failures. In the meantime, our advice to you is to enjoy the start of Spring! Whenever anything changes, we’ll post updates here or in our weekly Market Commentaries immediately. And as always please let us know if you have any questions or concerns. We are always here for you.
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Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion and Walsh cannot guarantee the accuracy of said information and cannot be held liable. You cannot invest directly in an index. Diversification can help mitigate the risk and volatility in your portfolio but does not ensure a profit or guarantee against a loss.