March 2023
• How these bank closures are different and likely not as problematic as the collapse of Washington Mutual and other banking issues the country faced in 2008.
• Details on how the Federal Reserve is protecting depositors at these two banks and other banks that may face similar challenges.
• FDIC insurance limits and recommend clients take action if they exceed these dollar limits at their bank.
• The contrast of Charles Schwab’s and Fidelity’s business models to traditional banks, highlighting that these institutions are designed to be more resilient.
At Morton, we are continuing to monitor this closely and will update you as the story develops.
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Hello, everybody, and thank you for joining us for another episode of THE FINANCIAL COMMUTE. I'm Chris Galeski, your host, joined by Chief Investment Officer Meghan Pinchuk. Meghan, thank you for joining us.
Thanks for having me.
Interesting week in the markets, specifically with banks. We're here to talk about Silicon Valley Bank and sort of what happened with their collapse. And now the Fed is sort of come in and helped them out. So interesting. When we talk about this, it brings up fears back to 2008. This is the second largest bank to fail since Washington Mutual in 2008.
I know a lot of clients have some concerns or fears relating back to that, you know, 15 years ago. What are your thoughts about the differences between Silicon Valley Bank today and the Washington Mutual issue, you know, 15 years ago?
Yeah, it is a very different situation. So back in the 2008 scenario, Washington Mutual really had bad assets. This is back during the subprime mortgage crisis. So the assets that they had on their balance sheet to essentially cover their depositors meet, their liabilities were ended up being bad assets. So they had that problem inherent in their system. Today, that's not the issue. The assets the Silicon Valley Bank had were actually higher quality assets. They had loans, they had U.S. Treasuries. But there was concern there was a liquidity crunch because those assets were not were not liquid enough to take care of all the depositors that wanted their money back.
Yeah, I think that's a really nice, distinction between 2008 and today. Right. In 2008, a lot of these banks made ninja loans, no income, no job, no assets, no worries. We're going to give you money and you can go buy that house that caused a collapse of the housing crisis and those banks. Whereas today Silicon Valley Bank is more being exposed to one type of client that put them a little bit more at risk.
So their largest client is the tech industry and specifically venture capitalist companies and startups.
Correct.
And so for the last 13, 15 years, access to money as interest rates were low, was very easy for VC firms and tech startups. And so life was good for Silicon Valley Bank up until last week, when all of a sudden there was this fear or run on the bank and contagion that set in because you know, a lot of these VC firms or tech startups, they needed access to those dollars to operate their businesses, make payroll, and they didn't have other avenues.
So these depositors were saying, Hey, Silicon Valley Bank, I need more. And Silicon Valley Bank ended up having to take some of those treasuries or assets that they own. And go out and sell them in the market to create liquidity. Right. And by doing that, they had to sell them at a loss.
Correct. So a lot of these assets, even though they're safe, they're safe assets in the sense that they're backed by the government treasuries because of what's happened with interest rates, those assets are worth a lot less than they were previously. So you're talking large losses on these safe assets that they're holding on their balance sheet. So that was definitely a piece of it.
So it looks like early indications are, though, that actually their assets are going to be sufficient to cover depositors. So I think the numbers are something like 170 billion of assets and something like 160 million of liabilities for these depositors. So it looks like early indications are there's going to be reasonable coverage, but the issue is the liquidity of those assets.
So I think up 170, it was something like 110 billion are in securities. So some of these government securities and things that are now taking hits in price and then the rest is in loans. So those loans aren't liquid. Those loans, they can't just call them back immediately and have them available to meet depositors. I think this is typical, though, structurally for any bank.
So banks, the nature of a bank is, you give them $100, they're not just keeping $100 and waiting for you to take it out. They're going to lend out in some cases that the ratios are something like $0.90 of that, it's going to go out $0.90 on the dollar. So it's this is the nature of the banking system.
And when you have a confidence crisis where you've got a run on the bank like this, this is what can happen where even if the assets are there, if they're not immediately liquid, you've got this mismatch, this real issue.
Yeah. And that's where that's where the bank runs sort of kind of spiraled. And in this day and age, with technology and social media, things move very, very quickly.
So in this case, you mentioned this. It was very much so. Silicon Valley Bank’s investor base was concentrated in the tech space. It was, I believe, over 90% businesses. So that's very different as well. But over the weekend, the Fed, the Federal Reserve came in and essentially backstopped Silicon Valley Bank. They have promised to make all depositors whole and in large size, they're now coming out and saying that they're going to provide a lending facility to two banks to basically shore up short term liquidity.
If you have short term liquidity needs, you have some issues. They can come to the Federal Reserve and get a loan. And again, we're talking large dollars here that the Fed is now promising to use for banks.
Yeah, thank you for highlighting that key point. So Signature Bank went under over the weekend and then Silicon Valley Bank having issues and the Fed seizing control on Friday. Basically on Sunday, the Fed came out and said that they are going to insure all deposits and that they are protected and accessible by Monday morning for each of those two banks.
And so in addition to that, they now have this lending facility where other banks, smaller, more regionalized banks can access loans to help meet customer needs as well.
And what they're trying to do is they're trying to shore up confidence in the banking system. If Silicon Valley Bank, if everyone hadn't wanted their money, once again, this wasn't a disaster where they were holding terrible assets. It was an issue where everyone wanted their money at once. They didn't have the liquidity. So the Fed is trying to come out and reassure depositors that their money is safe, essentially that their banks are going to the banks are going to be okay so that you don't have this problem repeat itself in the future.
I guess I would just say that generally speaking, this is more of a concern with a regional bank. But generally speaking, investors should look at FDIC limits and try to keep their deposits at any bank or institution below that limit if possible.
Yeah, thank you for bringing it up. I mean, we talked about Silicon Valley Bank and like what's going on. A little bit how it affects you is paying attention to the FDIC limits that you're exposed to. So if you've got money at your local regional bank or even other banks, making sure that you're aware of that $250,000 limit, there are some nuances to it, but that's something that that people should look into.
And one option for us. So we use Schwab and Fidelity as a broker dealer or custodian of our clients assets. So one thing is those are all banks and financial institutions right now I think are somewhat in the spotlight or in the news. It is important to note that those broker dealers are very different business models than a typical bank.
So again, we talked about this, the idea that a bank, a bank takes in $100, maybe they lend out $90 of that. So that's their business is being fairly levered that way in terms of lending. Schwab and Fidelity, very different. That's a very small piece of their business model. But generally speaking, they're much more diversified businesses. So Schwab just came out with a press release saying that their ratio was 10%, meaning that if they took that $100, it is around $10 that they're actually lending out.
And it's in very high quality securities, high quality loans or margin loans where they're basically they have assets pledged to back them. So they came out with a press release reassuring everyone in their security. But I do think it's important to note that that those broker dealers, those custodians, it's a very different business model. So I don't think subject to the same risks that we're talking about here.
You know, Meghan, you bring up some really good points about how, you know, Schwab is a different business model than traditional banks in terms of the amount that they lend. Obviously, it's important to take a look at the amount of coverage you have for FDIC insured limits and maybe reach out and speak to your advisor to kind of talk through it and figure out what the best resources are for you.
Yeah, absolutely.
All right. Thanks for joining us.
Thank you.
Disclosure:
Information presented herein is for discussion and illustrative purposes only. The views and opinions expressed by the speakers are as of the date of the recording and are subject to change. These views are not intended as a recommendation to buy or sell any securities, and should not be relied on as financial, tax or legal advice. You should consult with your financial, legal, and tax professionals before implementing any transactions and/or strategies concerning your finances.
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