March 2023 Market Commentary Update & the Banking System

What is happening with the Banks?
By Don VandeVanter, CPA
Written on March 13th, 2023

On Friday, March 10, 2023, the California Department of Financial Protection and Innovation closed Silicon Valley Bank (SVB), and the Federal Deposit Insurance Corporation (FDIC) was appointed its receiver. With over $200 billion in total assets, SVB is the second-largest bank ever to go into receivership. Signature Bank of New York (SBNY) also went into receivership yesterday, March 12.

The Federal Reserve, Department of the Treasury, and the FDIC made a joint announcement yesterday evening that they “are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system. This step will ensure that the U.S. banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth.” The Federal Reserve also announced it will “make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors.” The Federal Reserve has coined this program the “Bank Term Funding Program.” The full transcript can be read here:
https://www.federalreserve.gov/newsevents/pressreleases/monetary20230312b.htm.

The FDIC has assured all depositors to SVB will have full access to their money beginning today, March 13, including those deposits in excess of $250,000.

Despite these steps, most financial institutions are seeing their stock valuations decline, some of them very significantly over the last week. The losses at SVB and SBNY were not driven by bad lending decisions but rather by bad asset management. Over the course of 2020 and 2021, as the Federal Reserve and the US government poured trillions of dollars into the financial system, banks were flooded with deposits. In return for the oversupply of money, banks did not have to pay much interest at all for those deposits, with savings rates of less than 0.10 percent and 1 year CD rates of less than 1 percent. As the Federal Reserve began its fight against inflation in March of 2022, Treasury rates began to increase substantially. Investors saw an opportunity to earn some yield on their money and began withdrawing their deposits at banks to invest in Treasuries and other securities that had yields in ranges of 2 to 4 percent. Banks, such as SVB and SBNY, did not have the cash reserves to meet the demand for deposit withdrawals, so they had to begin liquidating their investment portfolios (many of which were securities bought in 2020 and 2021 with low yields) and incurred significant losses (because of the rise in interest rates). SVB disclosed last week losses on the sale of securities in excess of $1.8 billion. More information on the demise of SVB can be found here:
https://www.cnbc.com/2023/03/10/silicon-valley-bank-blowup-highlights-deposit-risks-vs-treasurys.html.

Bank analysts see the potential for more runs on banks in the short term but many believe that these banks should have time to raise cash levels to meet these demands.  “The question is for depositors with balances over $250K, how comfortable are they with their bank and do they attempt to diversify?,” said Citi analyst Keith Horowitz. “We believe regionals with less diversified and large uninsured deposit bases are at risk of deposit flight but not at the speed of SVB and they should have time to tap wholesale funding markets (such as FHLB) and raise cash levels,” he added, referring to the Federal Home Loan Bank system. This is where the Bank Term Funding Program announced by the Federal Reserve should help these banks raise cash without booking losses.

At Christian Financial Advisors^®, we have reviewed the portfolio of Certificate of Deposits we have purchased recently for our clients. We do not have more than $250,000 invested on behalf of any one of our clients in one financial institution but have these investments spread over many financial institutions. We would encourage any of our clients with cash holdings greater than $250,000 at any one financial institution to review the financial reports of that institution to see if they have any significant exposure in their marketable securities that may hinder them from being able to meet any demand on their deposits.

On a bright note, the recent sell-off in stocks, coupled with the news that the average hourly earning rate increase came in much lower than expected, has led to a significant increase in the value of short-term marketable securities, which may in itself help some of the banks alleviate their exposure in this area. Many are now speculating that the Federal Reserve may slow the increase in rates as well. In addition, the federal government, including President Biden, is making announcements that the US banking system is safe.
https://www.nbcnews.com/politics/politics-news/biden-deliver-remarks-silicon-valley-bank-shutdown-rcna74622

Written by:
Don VandeVanter, CPA

Approved by:
Bob Barber, Founder
Shawn Peters, Vice President