With March comes basketball, green beer, and …. a banking crisis? During the first full week of March 2023, two significant California-based banks (Silvergate and SVB) closed their doors due to insolvency. While banks do sometimes fail, we have a mechanism for the protection of depositors’ money. Failures are generally (with the exception of the 2008 Financial Crisis) one-offs, taken in stride by investors and the depositing public. This time, there are failures yet to come.
When failing banks are high-profile, such as the Silicon Valley Bank (SVB), the 16th largest bank in the country, that’s headline news. While SVB was the “go-to” bank for Tech Startups, Silvergate (the earlier failure) served the Crypto Industry. Is anyone else thinking, what could possibly go wrong?
Any ranking of risky ventures would most likely include Crypto and Business Startups. Another form of risk is incurred when there is too little diversification in an investment portfolio. With banks, their portfolio is a combination of loans to customers and internal reserve capital. SVB was mismanaged in both. Recent falling bond prices created a liquidity crisis, which might be survivable during good times, but causes trouble when withdrawals suddenly accelerate. That happened at SVB.
Because banking is a highly regulated industry, we expect State and Federal regulators to discover and correct problems before they become dangerous. Were regulators asleep at the wheel? You decide, as information is being released daily. In the case of Silvergate, not much information is being made public, as SVB is causing a gigantic distraction, due to its size.
While the FDIC (Federal Deposit Insurance Corporation) exists to protect depositors and is funded by insurance premiums paid by member banks, coverage limits are only up to $250,000 per account registration. In the case of SVB, many wealthy depositors had accounts far in excess of FDIC limits. This is where we can generally count on the Federal Government to make exceptions for their friends and donors, and once again they did.
Disregarding insurance coverage limits of $250,000, Janet Yellen’s Treasury announced that all SVB deposits would be reimbursed. Sure, they plan to pay the funds from the FDIC, but that will greatly reduce the reserves of the FDIC, which may have to cover additional failures in days to come. Then what? (Hint: they will come after the taxpayers -- us.)
This is reminiscent of an old Saturday Night Live skit about the mythical First CityWide Change Bank, whose sole function was to make change (e.g., 4 quarters, two quarters and 20 nickels, or other combination for your dollar). When asked how they made money, the spokesman simply explained, “We make it up in volume.”
Van Wie Financial is fee-only. For a reason.