There has much discussion this past week about Silicon Valley Bank and other Banks that have caused stress on the financial markets. We wanted to give you a summary of what happened and what steps Journey Advisory Group is currently taking. Also included is a commentary from Charles Schwab to reassure you that your securities are safe with a strong custodian.
Please feel free to contact your Journey Advisory team with any questions.
Silicon Valley Bank – What & Why – Journey Advisory Group (JAG) Next Steps
- Silicon Valley Bank (SIVB) – was shut down as a going entity on Friday 3/10/23. (This is the 2nd largest bank default since Washington Mutual in 2008. Silicon Valley Bank is the 16th Largest Bank in the U.S.)
- Signature Bank (in NY) – was shut down on Sunday 3/12/23)
Why it happened at Silicon Valley Bank (SIVB)?
SIVB (The Bank) had a rapid increase in deposits in the last 2 years from venture capital, tech, and private equity companies. The Bank used the deposits to invest in long-term bonds. With the increase in interest rates, their bond portfolio was negatively impacted. The bank sold a portion of their bond portfolio at a material loss. Based on this news, the Rating Agencies (S&P and Moody’s) downgraded the credit rating of the Bank. The Bank then looked to raise at least $2 Billion in cash from a stock sale. The stock sale failed. Starting last week, word got out to customers, and there was a major run on the bank.
What is happening right now? (3/13/23)
Due to Bank Term Funding Program (BTFP), Customers with deposits at SIVB and Signature Bank will receive their cash from the FDIC on Monday, 3/13/23.
What are the implications for the financial markets?
- There could be continued switching of deposits around banks – especially to larger size banks. More than likely, there could be more bank failures going forward. The BTFP, will be a backstop to deposits below/above the FDIC level.
- Banks could be under higher regulatory scrutiny and margins could come under pressure and valuations on the banking sub-sector could be negatively impacted.
- Other Banks – Banks with assets below $250 Billion – have a lower regulatory scrutiny than the “too big to fail banks” – per current banking regulation. There will be a heightened level of risk in the regional banks and smaller banks with a lower asset base. Deposits could start to leave the smaller banks to go to the likes of larger banks JPMorgan, Bank of America, etc.
- The impact of the uncertainty in the banking sector, could slow down the momentum of the hiking in interest rates from the Fed. Before the SIVB news, the bond market was pricing a 60% probability of a 50 bps increase in interest rates for the 3/22/23 FOMC meeting. After the announcement of the Bank Term Funding Program (BTFP), the probability of no rate hike on 3/22/23 is now 60%.
What is JAG doing?
- JAG Investment Team will be reducing clients’ exposure to smaller banks and regional banks. We will be taking the cash proceeds and re-deploying the proceeds to other sectors.
This material prepared by Journey Advisory Group is for informational purposes only. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. Economies and markets fluctuate. Facts presented have been obtained from sources believed to be reliable. Journey Advisory Group, however, cannot guarantee the accuracy or completeness of such information, and certain information may have been condensed or summarized from its original source. Past performance is not an indicator of future results.
Our Perspective on Recent Industry Events
Watch Walt Bettinger on CNBC
March 13, 2023
Today, we released our regularly-scheduled Monthly Activity Report and commentary from our Chief Financial Officer. In that release, you can read about the strength and resilience of the Charles Schwab Corporation. Though we do not normally comment on these monthly releases, given the market environment we find ourselves in, we thought it was appropriate to do so this time.
For over 50 years, Charles Schwab has prided itself on being a safe, secure, and strong financial institution, the result of managing the firm with a “Through Clients’ Eyes” strategy and effective, disciplined risk management practices. We understand, though, with the heightened attention in recent days, people may still have questions. To the extent there are questions about any impact on Schwab, we want to clarify a few important points:
· Schwab investments held at the Broker Dealer are not commingled with assets at Schwab Bank.
· 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.
· We believe one of the best indicators of the strength and stability of the firm is our client activity. Our February results show that clients entrusted Schwab with more than $41.7 billion in net new assets – our second-strongest February ever following our strongest January ever. Our growth and momentum have continued in March, with daily net new assets of over $2 billion per trading day month-to-date, including Thursday and Friday of last week.
· Following the recent events in the banking industry, we are pleased to see the U.S. Treasury Department, Federal Reserve, and FDIC step in with decisive action to support depositors during this critical time. We think the steps announced today provide an additional layer of protection for individuals and will help boost confidence in the American banking system.
· 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.
Schwab’s long-standing reputation as a safe port in a storm remains intact, driven by record-setting business performance, a conservative balance sheet, a strong liquidity position, and a diversified base of 34 million+ accountholders who invest with Schwab every day. As such, we remain confident in our approach and in our ability to help clients through all kinds of economic environments. We stand ready to support our clients with award-winning service and time-tested expertise.
Founder and Co-chairman
CEO and Co-chairman