Bank Run Insights

It’s hard and often counterproductive to comment about breaking news while it’s still moving through the proverbial grinder — which is why we usually don’t. However, we feel it’s worth commenting on the growing number of regional bank runs.

Before looking at the details, we’ll lead with two larger assurances:

Our Advice Remains the Same

As you know, we typically seek to optimize your long-term outcomes by recommending against reacting to near-term upsets. This philosophy is based on our and others’ best thinking about improving your odds for investment success over time. As such, our strategy already expects that the unexpected WILL happen now and then. To a point, the stress of realized risks can even contribute to our expected returns.

What Happened?

As usual, there are several smoking guns. Perhaps the biggest shot has come from banks holding exceptionally large reserves of low-yielding bonds in today’s higher interest rates.

In the case of Silicon Valley Bank (SVB), for example, its tech-heavy clientele deposited large amounts of cash during the pandemic when the industry was awash in undeployed assets. The bank used the money to buy Treasury and other bonds.

As interest rates rose, prices for SVB’s bond holdings fell. Normally, this wouldn’t be a problem; whether you’re a bank or an individual investor, as long as you hold low-yielding bonds to maturity, you can expect to be made whole at the end. But if too many of a bank’s customers pull out their money all at once, the bank may be forced to sell their low-yielding bonds at a loss to meet the sudden demand for cash. As in the classic film, “It’s a Wonderful Life,” these bank runs can spin out of control.

Observations

To date, it would appear that the most at-risk banks are those that are:

Serving clients in cash-heavy industries, such as technology, cryptocurrency, venture capital, and private credit; and
Perhaps more significantly, holding large percentages of uninsured deposits.

To expand on that second point, today (versus during the Great Depression’s bank runs), the FDIC insures up to $250,000 of each bank customer’s deposits. If you’re married, you each receive protection of up to $500,000 on a joint account. If an account exceeds FDIC limits, the excess is uninsured. In the case of SVB, at year-end 2022, its deposits were valued at around $200 billion, but only about $30 billion of those deposits were insured. That translates to a lot of big accounts with uninsured balances.

Government Action

As expected, the government is not idle as events unfold. It’s “all hands on deck,” with rapid-fire announcements from the Treasury Department, the Federal Reserve, and the FDIC.

To staunch the immediate “bleeding,” these Federal institutions are taking joint emergency actions to protect affected account holders, in some cases promising to protect even those whose accounts exceed FDIC insurance levels.
There is also talk of walking back the originally projected March 21–22 Federal Reserve rate hike to help stabilize banks’ bond reserves. Time will tell whether broad market predictions here prove correct.
Discussion is underway on how to shore up any systemic concerns over time. For example, there are already calls for re-tightening banking controls such as capital requirements and liquidity rules for small- and mid-sized banks.

As such, while the news is as noisy as usual when fear is in the air, we are cautiously optimistic a worst-case scenario is avoidable. That’s no guarantee. But if we place today’s news in a historical context, the banking system has been under similar and worse strains and remained resilient.

You and Your Money

In the meantime, there are your own cash reserves and investments. During times of heightened risk, the longing to take hurried action becomes a pull often too strong to overcome on your own. Before taking any immediate steps, we suggest you discuss it with us.

Unfolding events underscore one action that may be advisable from a “better late than never” perspective. If the cash you hold in any one bank exceeds FDIC protection, there may be value in working out a plan for addressing that issue. Whether during the Great Depression or today, panic is rarely an advisable way to proceed.

Again, we are here. Our advice remains the same and is guided by your unique circumstances and grounded in the context of financial best practices.

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