Recent Events and What They Mean to You

With the second largest bank failure in US history last week, we have had several inquiries from clients with various concerns. Here are our thoughts on the matter.

With the recent bank failures and problems at Credit Suisse, what should you do about your cash accounts?

Banks are generally safe. No need to hide money underneath your mattress. Silicon Valley Bank (SVB)’s mismanagement around interest rates and the fact that most of their depositors were tech/venture capital firms were the main reasons for the bank’s collapse. All it took was a few big players in the tech industry to withdraw their funds to incite a bank run. We do not believe the SVB ordeal is systematic and have confidence that the solvency of the US banking system is sound.

The FDIC, Federal Deposit Insurance Corp., covers up to $250,000 per depositor, per account type, per bank. If you have $250,000 or less in your account, your guaranteed. So even if your bank’s financials are in trouble, your deposits are insured.

In further support of the banking system, federal authorities told everyone who had accounts at the now-closed SVB and Signature Bank that they would be made completely whole no matter how big their accounts.  We are encouraged by the government’s response and would expect a similar response if this happened to other banks.

Even with the additional government support, those with more than $250,000 should consider spreading out their deposits among multiple banks or be strategic about who is listed as the owner on the account. The FDIC insures up to $250,000 for each co-owner of a joint account, so if you’re married, you can get $1 million of FDIC coverage by having a personal bank account in your name, a personal bank account in your spouse’s name and a joint account.

Does this mean the economy is in a recession now?

We have been watching for and many have predicted a recession for over a year now. The ripple effects from recent banking issues could lead to credit tightening, pushing us into a recession. Regardless, we do not foresee this as another 2008 Financial Crisis, but the needle is pointed more firmly toward a recession at this point.

Over the past week, investors have been trying to sort this out as markets have been volatile ever since the SVB news. Movement has been both up and down in stock markets. Nevertheless, stock markets are not an indicator of a recession. In fact, investors could have already priced in the recession over the past year. An optimistic view would be that the (likely) upcoming recession could be a mild one and/or the bank failures could cause the Fed to slow down/pause their historical run of rate hikes, making investors bullish on the stock market again. Time will tell.

Are my investments at my brokerage (Fidelity) at risk?

Brokers are different from banks. There is less risk in keeping money at a broker-dealer or a custodian such as Fidelity because they are not engaged in the same type of lending as private banks (like SVB).

Brokerage accounts are not FDIC insured, but they are insured by the Securities Investor Protection Corp. (SIPC) up to $250,000 per account.  In the unlikely event that a broker goes bankrupt, there is still a degree of protection as custodians are required to keep customer assets separate from the broker or financial institution's assets. They cannot turn your investment holdings into theirs for trade or speculation purposes. You own your holdings.

If you have any questions or concerns, please give us a call.

Have a great weekend!