No one noticed, but almost all stock and bond categories registered positive returns this past quarter. A softening of inflationary factors – most obviously gasoline prices - has boosted investor sentiment.
In the wake of two regional bank failures, President Joe Biden has announced aggressive action intended to safeguard public confidence in our banking system.
The failure of Silicon Valley Bank (SVB) and New York-based Signature Bank do not signal systematic risk throughout the banking system, according to government officials, economists, and the financial press. To abate public anxiety, the government has launched a quasi-bailout of troubled banks, however controversial.
While our firm follows these developments and welcomes calls from concerned clients, we do not anticipate a contagion effect resulting from the recent bank failures.
Reassuring actions by U.S. Treasury, Federal Reserve
U.S. Treasury Secretary Janet Yellen, who is well-versed in crisis management, mobilized regulators over the weekend and announced the Bank Term Funding Program (BTFP), which is providing loans for up to one year to vulnerable banks, thus giving them a one-year window to clean up their balance sheets. This is consistent with the central bank playbook in times of emergency to err on the side of caution and go big.
In addition, the Federal Reserve Bank said, "The Board is closely monitoring conditions across the financial system and is prepared to use its full range of tools to support households and businesses and will take additional steps as appropriate."
The mass psychological benefits of these actions cannot be overstated as they should inoculate otherwise stable institutions from runs on the bank and prevent a panic-drive crashing of our economy. One beneficiary of this preventive medicine is First Republic Bank, our Financial District neighbor, that has received additional liquidity from the Federal Reserve and JP Morgan.
Source of trouble - not the giants
The main threat has emerged from small and mid-sized banking sector, not the big money center banks, what are designated as Global Systemically Important Banks (GSIBs). These giants are better diversified, well capitalized, generally more liquid, and subject to much more stringent regulations than small banks. The differences include much higher capital requirements, liquidity requirements, leverage limitations, frequency of stress testing – generally safeguards against conditions that brought down SVB and Signature.
SVB and Signature depositors will have full access to their money, including amounts in excess of the $250,000 amount guaranteed by the Federal Deposit Insurance Corporation. FDIC has not indicated if it would do the same if there were similar failures. However, regulators have announced emergency lending to struggling banks.
To some, failures at SVB and Signature may have been idiosyncratic. SVB experienced a classic run on the bank as its “extreme online clientele” exited when spooked by a poorly timed corporate communication. The pre-eminent banker to startups and venture capitalists, SVB is concentrated in high tech, its historic strength turned fatal flaw. Signature Bank, among other difficulties, had been accepting deposits in the form of crypto currency, a mystifying, highly volatile medium of exchange.
Regulatory easing that backfired
SVB and Signature may have invited disaster as its officials had successfully lobbied for looser financial requirements for midsize banks. In 2018 President Donald J. Trump signed legislation scaling back the “stress test” provision of the 2010 Dodd-Frank bill enacted by President Barak Obama.
Among those lobbying for watered-down reform was former Congressman Barney Frank, who, until this past weekend, sat on the Signature Bank board of directors. Political finger pointing and increased regulation has just begun - a reminder that banking is a permanent controversy and will always have unobserved vulnerabilities.
The strength of Charles Schwab & Co.
In contrast to SVB and Signature, Charles Schwab & Co. - our custodian for client assets - maintains a broadly diverse client base and conservative financial position (see below). It refuses to touch cryptocurrency and, in our 39-year experience, avoids financial fads.
Charles Schwab, founder and gray eminence, issued the following statement on Monday:
● Schwab has a broad base of high-quality customers across multiple lines of business, capital well in excess of regulatory requirements, a high-quality and relatively small loan book, and a conservative investment portfolio that is 80% comprised of securities backed by the U.S. Treasury and various government agencies.
● Collectively, more than 80% of client cash held at Schwab Bank is insured dollar-for-dollar by the FDIC. According to S&P Global Market Intelligence, that percentage is among the highest of the top 100 U.S. banks. As a comparison, the banks in the news the last few days have between 2% and 20% of their deposits insured.
● As a further safeguard, Schwab has access to over $80 billion in borrowing capacity with the Federal Home Loan Bank (FHLB), which is an amount greater than all our uninsured deposits. That helps provide the firm significant access to liquidity, so money is there when clients need it.
● Schwab does not have any direct business relationship with Silicon Valley Bank or Signature Bank, so we do not have exposure to any direct credit risk from either.
Please let us know your concerns
At Hanke & Co. Wealth Management, our first loyalty is to our clients and their financial security. We will suggest changes where indicated. Additionally, we are able to secure certificates of deposits among multiple highly rated banks in order to maximize FDIC protection.
During four decades of service, we have helped clients to weather many tumultuous episodes and, let’s not forget, to realize long-term prosperity. The failure of a few regional banks, though concerning, should not constitute of crisis, especially given quick actions by the U.S. Treasury, Fed, and FDIC.
We encourage you to call us to discuss any concerns as well as financial planning or investment management matters.
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