Silicon Valley Bank (SVB) out of California became insolvent last Friday. Yesterday, the Federal Deposit Insurance Corporation (FDIC) took over SVB to protect depositors for not only the $250,000 cap for each registered account but for all cash deposit amounts. Though the speed of the insolvency happened over a couple of days, the events leading up to it occurred over many months. It may help investors to know how those events led to insolvency and to understand how it affects the overall banking industry.

SVB was a bank that specialized in working with start-ups and tech companies. In 2020 and 2021, many of their clients had successful Initial Public Offerings and buyouts that created a windfall of over $200B in cash that was deposited with SVB. The bank used some of these funds to create loans for clients but at the time, many of the start-up and tech companies didn’t need funds due to the roaring economy and stock market. So, SVB decided to invest the excess funds in bonds and mortgages. But instead of buying short-term maturities, the bank purchased long-term bonds and mortgages to capture a little higher yield. When interest rates started moving higher in 2022, the bank started taking losses on those positions. The losses continued to grow and SVB waited too long to cut losses by selling the positions or obtaining additional funds to shore up its balance sheet. When SVB tried to obtain a cash infusion mid-last week, it was too late. Start-up companies along with many tech companies do not have a lot of cash on hand. Once they sensed SVB might be in trouble and they might not have access to their cash, they all started pulling funds which exacerbated the problem. Over $42B of funds were pulled out last Thursday, setting up the insolvency on Friday. Many mistakes were made by the SVB management team over the last year. WSJ

Signature Bank was a NY bank that dealt with a lot of cryptocurrencies and it was in trouble as well. The U.S. Treasury deemed Signature Bank, along with SVB, as systematic risks and took over the banks. They have made all depositors whole, even funds above the FDIC $250,000 limit, and stated all depositors will have access to their funds today. Though depositors have been spared, as it stands now, stock and bondholders of these banks will not receive any reimbursement or bailout of their investment.  CNBC

What Are the Ripple Effects? Some other banks that deal with a lot of start-ups or tech companies have been greatly affected. With their exposure to the same sectors as the other failed banks, their stock prices have been hit very hard even though some may have secured additional outside financing. Yahoo Finance The whole banking sector stock prices have come under pressure with regional banks suffering the largest losses. Due to the volatility, many market watchers are now expecting the Federal Reserve to pause or even stop short-term rate hikes. Reuters Due to the events surrounding SVB and other banks, the stock market was down sharply both Friday and this morning and bond yields had dropped. But as of midday today, the stock market was recovering, and bond yields had stabilized. Most experts believe that this event is not a threat to the wider banking system and that most consumers' deposits are safe. CNBC

What to Know: As of now, the U.S. government is pledging to do whatever it takes to stabilize the banking system. Reuters It is important to know that most institutions do not have concentrated risks to start-up/tech companies or cryptocurrencies but have a diversified client base.

What are the FDIC Coverage Limits? The Federal Deposit Insurance Corporation insures $250,000 per depositor, per insured bank, for each account ownership category. If someone has an account in their individual name and another account in joint ownership with someone, each account has $250,000 of FDIC insurance. It’s important to know FDIC coverage is for cash held at banks and does not include stock, bond, or mutual fund investments. Learn more about FDIC insurance by clicking on the link: FDIC

What About Cash at Schwab? There are a few different types of cash investments held by RSWA clients in their Schwab accounts. Any cash in brokerage accounts that is awaiting investment or withdrawal is often held in what’s called a “sweep” account. The sweep account cash is FDIC insured. Another cash investment is the Schwab Money Market funds. These are mutual funds backed by the investments in the funds and our clients invest in two different funds. The Schwab Government Money Fund, symbol SNVXX, invests in U.S. Treasury bills. U.S. Treasury bills are considered the safest investment in the world. The other fund clients have invested in is the Schwab Value Advantage fund, symbol SWVXX which has a much broader investment mandate. As of the end of the last quarter, SWVXX had almost 75% of the fund invested in U.S. Treasury bills, U.S. government agencies, and Certificates of Deposit. The rest was invested in short-term money market investments in large banks such as JPMorgan, Bank of America, and the Royal Bank of Canada. Click on the links for more information on the Schwab money markets: SNVXX SWVXX

As for the overall firm, Charles Schwab executives have also released a statement regarding the financial strength of the company. Charles Schwab

We will continue to monitor events closely on how they affect clients and continue to provide any necessary information. If you have any questions, please contact your financial advisor.

One Additional Note of Caution: Under the current volatile circumstances, we expect an immediate uptick in fraudulent and phishing emails. Please remain vigilant in your email responses and if you receive an email from a financial institution asking for you to respond or click on anything, reach out to the institution directly on your own first before taking any action.

Thank you,

The RSWA Team