How Secure Is Your Financial Institution?

In light of the recent failure of Silicon Valley Bank, many people are questioning the strength of their financial institutions. I’m writing to give you information about what kind of assurances you have and some of my insights.

Silicon Valley Bank is a regional bank that worked primarily with venture capitalists and various crypto adjacent businesses. This is not your typical public facing general deposit and lending type of bank. They relied on a large “Hold to Maturity” bond portfolio to meet their financial reserve requirements.

With the recent spike in interest rates, the value of their bond portfolio had shrunk below their capital requirements. If they had been able to hold on to their portfolio, the bonds would have paid out their full value at maturity, but they had too many depositors withdrawing their money, forcing SVB to sell the bonds early at a loss. The question is, what other banks are facing similar challenges? It is my understanding that this was a localized failure, with only a few smaller specialty banks being subject to similar risks.

The large consumer facing banks should not be significantly affected by this outside of speculation on their stock prices. For example, the bank holding my clients’ investment accounts is Charles Schwab. They released in their monthly activity report on the morning of 3/16/23 that more than 80% of their deposits fall within the FDIC insurance limits, and they have access to borrowing capacity in excess of all their uninsured deposits. All of this means that there is a small risk of wider banking issues like we have seen in past recessions. I recommend reading Schwab’s press release for more information.

Highlights from the Schwab Press Release:

“More than 80% of our total bank deposits fall within the FDIC insurance limits, among the five highest ratios of the top 100 banks in the United States.” Learn more about FDIC coverage.

“We have access to significant liquidity, including an estimated $100 billion of cash flow from cash on hand, portfolio-related cash flows, and net new assets we anticipate realizing over the next twelve months.”

Your holdings are also covered by the Securities Insurance Protection Corporation and additional private insurance held by Schwab. Here are their disclaimers. “SIPC provides up to $500,000 of protection for brokerage accounts held in each separate capacity (e.g., joint tenant or sole owner), with a limit of $250,000 for claims of uninvested cash balances. More information about SIPC coverage is available at www.sipc.org.”

“Additional brokerage insurance—in addition to SIPC protection—is provided to Charles Schwab & Co., Inc. accounts through underwriters in London. Schwab’s coverage with Lloyd’s of London and other London insurers, combined with SIPC coverage, provides protection of securities and cash up to an aggregate of $600 million, and is limited to a combined return to any customer from a Trustee, SIPC, and London insurers of $150 million, including cash of up to $1,150,000. This additional protection becomes available in the event that SIPC limits are exhausted.”

What Does It All Come Down To?

Many of my clients own US Treasury notes, which are backed by the US Government. Or my clients have bonds that if held to maturity will return principal and the agreed interest payments. The biggest challenge we face is an overreaction from the masses. At this point, the Federal Reserve, the government, and industry leaders are doing and saying things that are calming the markets, reducing the risk of a widespread panic.

If you look at today’s market action, the banking/financial sector of the market is down as expected, but other areas of the market are up. Why is that? Because the banking risk we are seeing will make the Federal Reserve less likely to raise interest rates. This is good for the general market. Also, many market analysts are placing buy ratings on financial firms, including Schwab because they believe this sell off is an overreaction. Time will tell if they are right.

I want you to know that I’m here for you, so please contact us if you have questions or concerns. If we keep cool, we will weather the storm. I don’t foresee making any major changes, but I will alert you if circumstances change.

Thank you for your confidence. May God’s blessings be upon you and our nation.

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