Cypress Wealth Services
Our mission is to bring clarity and confidence to your financial life. Something that we regularly discuss with our clients is that market uncertainty and negative headlines are part of the investing process. With that said, we also understand that times like these can bring questions. Our hope is that with a better understanding of current events, you can feel calm and confident even during turbulent times.
This past week, two major players in the banking industry, Silicon Valley Bank (SVB) and Signature Bank, collapsed after they had trouble raising capital to meet the demand for deposits. While there are several reasons why experts believe these failures are not part of a more significant economic crisis, individuals may be understandably concerned. These were the second and third-largest bank failures in U.S. history, behind only the collapse of Washington Mutual in 2008.
What Happened With SVB & Signature?
SVB and Signature Bank both failed due to liquidity issues stemming from a bank run. A bank run occurs when a large number of depositors withdraw their funds from a bank over a very short period of time (usually days). Because banks invest the cash deposited with them, a high demand for withdrawals can force the banks to sell off investments at a poor market price in order to meet the liquidity need. Consistently selling assets at a substantial loss can exacerbate liquidity issues and quickly cause a bank to become insolvent.
Silicon Valley Bank almost exclusively served tech start-ups and venture capital-backed clients, which were particularly hard-hit during the economic volatility of 2022. As financing started to dry up for tech companies and venture capitalists couldn’t come up with additional funding, clients began withdrawing funds from their accounts at SVB to meet the operating expenses for their businesses. SVB was forced to sell billions of dollars’ worth of long-term Treasury bonds (initially bought when rates were near zero) at a massive loss to raise capital. This spooked other depositors, many of whom had accounts well above the FDIC-insured limits and caused them to withdraw their money at an unsustainable rate. SVB could not meet their deposit requests and attempts to raise capital or sell the assets to a healthier bank were unsuccessful. The FDIC quickly stepped in as receiver and took over operations to prevent further damage.
A similar story unfolded at Signature Bank, which served mostly crypto investors. Similar to the depositors at SVB, many of the accounts held at Signature Bank were well above the FDIC-insured limits. Spooked by the failure of SVB, depositors at Signature Bank withdrew over $10 billion on Friday, March 10th. By Sunday, March 12th, the bank was taken over by the FDIC.
What to Expect From Other Banks
While the effects of the SVB and Signature Bank failures are hard to predict, the FDIC has reacted swiftly to prevent further damage. Regulators have invoked a “systemic risk exception” which allows the government to reimburse uninsured depositors. The Fed has also set up an emergency lending program to provide funding to eligible banks at risk of bank runs.
So far, small and midsize banks are at the most risk since they tend to focus on niche clientele who are more susceptible to industry-specific risks. Shares of regional bank stocks took a beating on Monday, March 13th as investors tried to process the news of SVB and Signature Bank. Larger banks were less affected.
What to Know About FDIC & SIPC Insurance
Despite the questions surrounding the health of the overall banking system, there are safeguards in place to protect depositors and investors.
Both the Federal Deposit Insurance Corporation (FDIC) and Securities Investor Protection Corporation (SIPC) provide insurance to preserve your assets.
The FDIC is an independent U.S. government agency that was established in 1933 to insure bank deposits. The FDIC insures deposits up to $250,000 per depositor, per account ownership category, per bank. This coverage includes checking accounts, savings accounts, money market accounts, and certificates of deposit (CDs) issued by FDIC-insured banks.
SIPC is a non-profit organization established by Congress in 1970 to protect investors against losses due to broker-dealer failures. If a member-SIPC firm fails and customer assets are unaccounted for due to record keeping errors or misappropriation, customer’s assts are made whole by SIPC up to $500,000 per customer for all accounts held in the same capacity, including a maximum of $250,000 in claims for cash. This coverage includes stocks, bonds, CDs, and mutual funds held in a brokerage account. It’s important to note that SIPC insurance does not protect against losses due to market fluctuations.
Cypress Wealth Services (CWS) has enjoyed a long relationship with Charles Schwab and TD Ameritrade, the primary independent third-party broker-dealer custodians for our client’s assets. Schwab recently shared information relating to their own financial strength and viewpoint regarding current events that you may find helpful: Our Perspective on Recent Industry Events
Investments at a broker-dealer like Charles Schwab or TD Ameritrade are held in the investors’ names. Investor assets are separate and not comingled with the assets of the broker-dealer.
Times Like These
While headlines may seem concerning, we have been here before. Lehman and Bear Stearns happened in 2008, and long-term investors reaped the rewards of staying disciplined through turbulent times.
If you have any questions about how recent events could affect your strategy or want to discuss ideas, please feel free to reach out to us. We are always here as a resource for you.
About Cypress Wealth Services
Cypress Wealth Services is an independent RIA firm providing financial planning and investment management to high-net-worth individuals, families, business owners, and institutions. Cypress Wealth Services comprises professionals with diverse backgrounds and extensive experience and qualifications. Cypress Wealth Services serves a broad range of client needs using their experience and expertise to act as a foundation for their client service process. The firm uses The Second Growth, which focuses on efficiently protecting, growing, and transferring the wealth and legacy a person has already built to their loved ones. With financial advisors in Palm Desert, CA, Tustin, CA, Athens, GA, and Anchorage, AK, the firm serves clients across the country with Wealth Management Services, Fiduciary Services, 401(k) Design and Management, Investment Reporting Services, Financial and Retirement Planning, and more. For more information, visit www.CypressWS.com or call 760.834.7250.