SVB Bank and US Depositor Risk

News headlines about the failure of Silicon Valley Bank (SVB) are everywhere. At this stage, speculation is rampant as to whether this will be an isolated event or whether other banks will experience similar challenges. Moreover, it is unclear whether this will lead to fallout in other industries for SVB’s depositors. The uncertainty is high and the future path is murky. It is very important in times of heightened uncertainty to focus on data and facts and to suppress emotion and conjecture.

Rather than speculating about what “may happen” we at WealthPlan group are focusing on what is known. The Department of the Treasury, the Federal Reserve, and the FDIC released a joint statement on Sunday providing assurances. Here is the statement in its entirety.

March 12, 2023
WASHINGTON, DC — The following statement was released by Secretary of the Treasury Janet L. Yellen, Federal Reserve Board Chair Jerome H. Powell, and FDIC Chairman Martin J. Gruenberg:

Today we 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.

After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, California, in a manner that fully protects all depositors. Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.

We are also announcing a similar systemic risk exception for Signature Bank, New York, New York, which was closed today by its state chartering authority. All depositors of this institution will be made whole. As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer.

Shareholders and certain unsecured debtholders will not be protected. Senior management has also been removed. Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.

Finally, the Federal Reserve Board on Sunday 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 U.S. banking system remains resilient and on a solid foundation, in large part due to reforms that were made after the financial crisis that ensured better safeguards for the banking industry. Those reforms combined with today’s actions demonstrate our commitment to take the necessary steps to ensure that depositors’ savings remain safe.

This is a strong statement of support of the banking system, providing security to the depositors in these banks while simultaneously allowing investors to fully bear the capital losses associated with investments in equity and subordinated debt securities offered by these institutions. The bank regulators and financial market authorities are drawing a stark line between depositor safety and capital markets risks. They are not attempting to limit capital losses emanating from investments in these institutions’ associated securities. Additionally, the backstop measures the Fed is providing to member banks help ensure there is no need for panic-based depositor withdrawals from the broader banking sector. All told, we expect the banking sector to be stable. However, we recognize that things can change swiftly so we will remain vigilant.

With respect to the investment portfolios we manage at WealthPlan, we have no direct exposure to the stocks of either of the banks mentioned in the press release above. We do have exposure to some bank stocks and will be vigilantly monitoring these holdings in the coming days. Our expectation is that any banks facing similar balance sheet risks would have come forward over the weekend to alert authorities. We are cautiously optimistic we have seen the worst of this episode.

It appears the actions taken by regulatory agencies has stemmed the tide of this banking sector risk event. Nonetheless, investors should continue to expect periods of heightened market volatility and uncertainty to manifest periodically in the capital markets as the Fed continues to combat inflation within the broader economy.
As always, we wish to express our gratitude for your patronage and the trust you place in our firm to manage your wealth.