On Friday, March 10th, the Federal Deposit Insurance Corporation (FDIC) took the unusual step of shuttering a major bank during business hours.  Silicon Valley Bank (SIVB) had become the 16th largest lender in the United States by the end of 2022 with assets and deposits over $200 billion and $170 billion respectively.  The cause of this is unlike what we have seen in past bank failures. The basis for the Great Financial Crisis of 2008 came down to bad loans made, toxic structured products, and bad assets on bank balance sheets.  It was a credit issue.  Today is totally different. The root of Silicon Valley Bank’s issue is interest rates.  The rapid pace of interest rate hiking by the Fed has caused the value of SIVB’s bond portfolio to decline.

Banks are essentially leveraged fixed income portfolios.  They take deposits from customers and pay interest to hold the funds. In turn, they earn a higher interest rate on the deposits by loaning to others or investing in government bonds. When depositors started to realize SIVB was potentially vulnerable due to the fixed income decline, they began withdrawing their money. That news snowballed and manifested in a true “run on the bank.”

A joint statement from the Department of Treasury, Federal Reserve, and FDIC was released Sunday night. They are taking a two-pronged approach to relieve the pressure. First, depositors at SIVB and Signature Bank (a second bank that failed on Sunday night) will be made whole. As of Monday morning, depositors had full access to their cash. Second, the Fed has created a Bank Term Funding Program (BTFP). This program will provide loans to banks on their collateral at par for up to a year. More simply put, rather than banks having to sell bonds in the market at a loss to pay back depositors, they may now receive a loan at full face value from the Fed.

These actions should relieve some of the pressure in the banking system. However, SIVB and Signature Bank are not alone in what happened to their fixed income portfolios.  The system wide run on the banks the Fed is trying to stave off may still occur. Depositors may now look at their corner banks or their cash deposits a little differently and may decide a larger financial institution like JP Morgan or Bank of America is where they are more comfortable. Time will only tell how this will play out.  Success of the Fed’s actions is not measured by the market being up or down. Success is determined by evaluating if the Fed has stopped the run on regional banks.

So how does all that relate back to you? 

• For most clients of Summit Financial Strategies, the SIVB failure is not likely to have much direct impact.  SIVB stock was a minimal holding in the equity portion of client portfolios, held mainly in large cap index funds (generally less than 0.1% of the respective indexes) and was 0.8% of JP Morgan’s Large Cap Growth Fund as of the 1/31/2023 holdings report.
• Review your bank accounts to verify you are below the FDIC insurance limit. You can use the FDIC’s Electronic Deposit Insurance Estimator to help determine if you have uninsured deposits.
• Both Schwab and Fidelity have multi-bank cash sweep features that provide FDIC coverage beyond $250,000 per account holder.   Schwab provides FDIC protection for up to $500,000 of uninvested cash per account holder.  Fidelity’s default sweep money market is covered by SIPC plus excess insurance for total coverage of $1,900,000 of cash per account holder.  Fidelity also offers a program to provide FDIC protection of up to $1,250,000 of uninvested cash per account holder.
• Your Schwab and Fidelity accounts with Summit are protected by SIPC (Securities Investor Protection Corporation). SIPC is a non-profit corporation who works to restore investors’ cash and securities when their brokerage firm fails.
• Both Schwab and Fidelity provide brokerage customers additional “excess of SIPC” coverage.
• Money market mutual funds such as Schwab Value Advantage (SWVXX) and Fidelity Government Cash Reserves (FDRXX) are classified as securities and fall under SIPC protection.
• Schwab has gained attention today resulting in the following release “Our Perspective on Recent Industry Events.”

Other helpful resources:
SIPC: What SIPC Protects
FDIC: Deposit Insurance at a Glance
FDIC: Are My Deposit Accounts Insured by the FDIC?
Schwab: Asset Protection
Fidelity: Safeguarding Your Accounts

The Fed’s intervention shows they are ready and willing to act.  If conditions deteriorate, we believe the Fed will intervene as necessary to restore stability and confidence. News comes quickly at times like these.

As always, your team at Summit is available if you have any questions or concerns.