The markets were up last week after the Federal Reserve Bank increased rates by a quarter of a percent. This was largely in line with expectations. We’ve seen bank stocks falter recently, with continued fears of a contagion of bank failures.
Before we all panic and run down to line up outside the Baily Savings & Loan, let’s break down what’s really happened. As we discussed a few weeks ago, Silicon Valley Bank collapsed and was taken over by regulators. Their clients were largely technology start-up companies, which are subject to interest rate risk. These are cash-heavy businesses, and many have debt as well as equity funding. When rates rise, they need to pull more from their deposits to cover loans. At the same time, SVB had invested heavily into long-term treasuries, which are subject to interest rate risk. Not a good combination.
Swiss banking regulators recently negotiated the purchase of Credit Suisse by UBS. While rising rates had an impact, Credit Suisse has struggled for several years, so this is not new. Deutsche Bank shares faltered on Friday, but again this is nothing new. The bank has years of poor management decisions.[1]
As with the collapse of SVB, and the complete backstop of those deposits, banking regulators around the world have moved to provide additional lending to banks.
I’ve gotten a number of calls over the last two weeks, asking if people should pull their money from their local bank. After the great depression, the US created the Federal Deposit Insurance Corporation. It’s funded by fees from banks across the country and provides insurance on deposits up to $250,000 per account owner per bank.
If you and your spouse jointly own an account, $500,000 is insured. If you own an account in your name, and one under your business name and EIN, each account is insured up to $250,000. If you own three separate accounts under your name and Social Security Number at one bank, you are only insured up to the $250,000 limit. If you are holding more cash than that, you might consider moving part to another bank to stay under the FDIC limits.
Some things are not covered by FDIC. Checking and savings accounts, money markets and certificates of deposits are insured. Prepaid debit or credit cards are generally covered by FDIC insurance.[2]
What about your brokerage or investment accounts held at investment firms? Those fall into two categories. Many brokerage firms hold your investments in street name, meaning they are owned by the brokerage firm and held for your benefit. The brokerage firm can lend out your securities, and pledge them as collateral for their own loans. They use SIPC, or Securities Investor Protection Corporation, to insure you against losses. SIPC covers you up to $500,000.[3] Some other companies hold client assets in trust, so there is no need for SIPC protection. If you’re worried, talk with your advisor about the custodian for your accounts.
Your action item this week is to check your smoke detectors. Either replace the batteries, or upgrade to the new ten-year sealed models.
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Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor. Tax advice offered through CovingtonAlsina Tax Services.
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[1] Wall Street Journal, Stocks Wobble as Bank Turmoil Mounts by Ryans Dezember and Joe Wallace 3/24/23