Silicon Valley Bank, First Republic and Signature Bank
We have all seen the headlines surrounding these 3 banks with regulators stepping in to run the bank and get deposits back to depositors.
It is important to note that the depositors and borrowers of these banks were unique. For instance, Silicon Valley Bank provided financing for almost half of the US venture-backed technology and health care companies. When the term “venture-backed” is used, it implies start-up, early-stage companies. In fact, Silicon Valley Bank, First Republic and Signature bank all had ties and were in the business of lending to early stage/startup companies and their executives including the crypto currency sector.
Many people forget that deposits are a liability to a bank. Meanwhile, banks are not required to keep all the deposits on hand. They can invest it and loan money out.
I did a video a few years ago trying to demonstrate the price fluctuation of bonds when you have a long duration. The longer the duration, the more price fluctuation there will be on the bond prices when interest rates change.
Silicon Valley Bank got caught in a squeeze where they invested/bought longer-term maturity treasuries. They held bonds with a high duration. Silicon Valley Bank was losing money on its long-term bond portfolio every time interest rates were increased by the Federal Reserve. However, this was only a paper loss until its clientele decided to pull deposits for their cash needs. This forced the bank to sell and realize the losses in order to meet the demands as the depositors withdrew funds.
The pressure these banks went through was due to their unique clientele, their decisions on what to do with their deposits, some of their deposit requirements, and a change in interest rate policy.
Bellwether Wealth does use Charles Schwab as our custodian. However, this is a different entity and not part of Schwab Bank. Investments held by Schwab are in the investor’s name and are not comingled with assets at Schwab bank. Schwab bank has a high amount of current liquidity and has had access to more liquidity. Schwab bank was prepared for an event long before the events at SVB, First Republic and Signature Bank ever occurred. Also note that Schwab bank also had no direct relationship with SVB, First Republic or Signature Bank.
And just like 2008 when the FDIC took over Washington Mutual, the banking sector will be under scrutiny for a while. I am sure there will be more details that will continue to come out over time as depositors are made whole on limits well in excess of the Federal Deposit Insurance Corporation’s cap of $250,000. It will become both a financial and political football that gets thrown around.
Finally, our Optimizer process does not currently have any financial sector exposure. Today the S&P closed down about .15%. Our 50/50 model was up .54%, led by the Utility sector.
If you have any question, please reach out.
Clark S. Bellin, CIMA®, CPWA®, CEPA
President & Financial Advisor, Bellwether Wealth
402-476-8844 cbellin@bellww.com
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