Silicon Valley Bank and Signature Bank Failures – A Crisis in Confidence, Not Cracks in the System

On Friday, March 10, regulators took control of Silicon Valley Bank as a “run on the bank” unfolded. Two days later, regulators took control of a second lender, Signature Bank. Just 15 years earlier investment banks Bear Stearns, Lehman Brothers, and Merrill Lynch collapsed under the weight of bad mortgage bets that marked the beginning of the biggest financial crisis since the Great Depression. Is America on the precipice of another financial disaster? In short, no.

It has been a month since Signature Bank and Silicon Valley Bank collapsed. While the facts are pretty well-known at this point and any possible contagion to other banks or sectors are hopefully contained by aggressive government measures, this story echoes almost every one that came before it; it was driven by greed and fear. Greed by the executives running the banks to grow their companies (and share prices) at all costs by attracting new business while not properly managing and accounting for their assets and balance sheets (what is referred to as “risk-management”). Fear by the people who were banking with these companies.

Without repeating every detail that took place, this was a classic example of a run on a bank. While there could be additional bank failures this year, we do not believe this is the beginning of another financial crisis. In 2008, a collapse in the housing market caused complex Wall Street securities to be worth pennies on the dollar… wiping out banks’ balance sheets. 

Today, the primary issue is that long-dated bonds in hold-to-maturity accounts are worth less than their current market value. For example, a 10-year U.S. Treasury bond bought at historically low yields in 2021 is worth about $0.80 on the dollar. If held to maturity, the investor gets the full $1.00 back. The challenge in today’s banking and financial world is not if investors will receive their money, but whether they have the time to wait for their investments to pay off. If you are a venture capitalist backing a business that is losing money in an economic environment where the cost of capital is high and it is challenging to raise money, then time is of the essence. This group represents many of the people and companies that kept their capital and cash reserves at Silicon Valley Bank and Signature Bank.

Thankfully the U.S. government has proven yet again that they’ll go to great lengths to support our financial system. For example, top U.S. regulators including the Treasury Department, the Federal Reserve, and the Federal Deposit Insurance Corporation intervened to guarantee all deposits at SVB and Signature. The Federal Reserve took additional action by establishing the Bank Term Funding Program. This will allow banks holding safe assets such as Treasuries or government back mortgage bonds to bring them to the Fed and swap them for cash for up to a year. Looking ahead, we should expect the U.S. government to impose greater capital and financial regulatory requirements which may impede the profits at regional small to mid-tier banks. At the end of the day, in the United States we have the most stable and transparent financial system in the world. Period. For investors, this is the greatest perch to stand on.

ZRC Wealth Management has successfully navigated clients through many challenging events and market cycles – we approach this event with the same discipline. Changing market environments are just one of the factors we account for in clients’ financial plans. 

What should you do about it?

  • If you have cash in a bank, know that up to $250K per account holder, per bank, is insured by the FDIC. If you’re concerned about your exposure, you can diversify across multiple banks.
  • You can also speak to your wealth advisor about putting some of your money to work in high-quality fixed income investments, as they provide attractive yields and avoid relying on a single financial institution.
  • As for the rest of your portfolio, stay the course. Volatility can be uncomfortable, but selling out of markets has historically been the wrong choice.

History tells us that staying invested through volatility can benefit investors over the long run.

Should you have any questions or comments – please do not hesitate to contact your Wealth Advisor.

From more on ZRC Wealth Management’s Key Investment Principles click here.

All investing is subject to risk, including the possible loss of the money you invest. Past performance is no guarantee of future returns. Diversification does not ensure a profit or protect against a loss in a declining market. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.