Last week saw increased volatility in the investment markets. Some of this heightened volatility was due to recent inflation reports indicating the Federal Reserve may have to increase interest rates higher and keep them higher for longer than the investment markets previously expected.
The second factor influencing the markets was the FDIC takeover of Silicon Valley Bank (SVB) on Friday and Signature Bank on Sunday. At its core, banking is a relatively simple business. Banks raise deposits and make investments in loans or bonds. To do so successfully requires a bank to manage a few risks. First, they need to earn more from their investments than they are paying on short-term deposits. Second, they must manage the risk of making bad loans or incurring investment losses in their bond portfolio. Lastly, and most importantly, they must keep deposits in the bank.
The FDIC took over Silicon Valley Bank because it did not correctly manage the aforementioned risks. SVB invested heavily into long term, low-yielding bonds that declined in value as the Fed steadily increased interest rates in 2022. To meet depositor demands for withdrawals, they were forced to sell some of those bonds at a $1.8 billion loss, thereby scaring depositors and inducing a run on the bank.
One of Silicon Valley Bank’s primary target markets was directed to tech start-up companies and their venture capital partners. Just as investing in a new business is risky, making a loan to a tech start-up can be risky. Many of the venture capital firms investing in these start-ups were at the front edge of pulling significant deposits from SVB after the bond losses were disclosed.
It is important to note that our banking system as a whole, manages investment portfolios with a much lower risk profile than did SVB. SVB targeted tech start-ups, whereas most community banks make lower risk mortgage or auto loans to their customers or engage in collateralized lending to their corporate clients.
Lastly, Glass Jacobson custodies client assets with Charles Schwab and Fidelity. This is very different and distinct from a bank deposit account. Client brokerage accounts are individually registered and never co-mingled with the custodian’s corporate funds; therefore client accounts are safe even if Schwab or Fidelity should ever fail. As for excess cash held in brokerage accounts and swept to Schwab Bank for overnight investment, these funds are also secure to FDIC limits. Excess funds at Fidelity are invested in a money market fund rather than using a bank sweep option.
Both Schwab and Fidelity possess some of the strongest financial metrics in the industry. Here you will find a statement issued by the Founder and CEO of Charles Schwab assuring its clients that its holdings are strong, and liquidity is ample to cover any client funding needs. You may also access Fidelity’s assessment of the current situation and impact on the banking industry here.
We hope this note provides you with some background in the current situation and offers some comfort that your accounts are safe and secure. However, we are always available to answer additional questions.