Hi, my name is John Simkins and I’m here with another rendition of Ask the Advisor. And so the question I’m getting asked lately is, “Is my bank account safe?”
And so this started a couple of weeks ago with Silicon Valley Bank. The Fed came in on a Friday and closed it down. And so what Silicon Valley did was in 2021, they started buying these government treasuries that had a long duration, like 30 years, at these low-interest rates. And as the Fed started raising interest rates in 2022, that portfolio of long-term, secure investments dropped in value. So let’s talk about what that means because bonds have an inverse relationship. So if I go out and I buy a US treasury with a 30-year maturity at 1% and today I could buy that same 30-year maturity and get 4%, that value of that 1% mature bond that goes the same timeframe is now worth less.
So the longer the maturity, the duration is referred to it, the greater the movement in that interest rate cycle, the greater the loss in the investment, and the inverse happens when interest rates are going down. That 30-year investment now is worth more because it’s at a higher rate than what the current rates are.
And so not quite sure how Silicon Valley was expecting to manage their duration risk is how we’re referred to it in this rising rate environment. But it’s something at Stewardship Advisors we looked at and we prepared for back at the end of 21 because the Fed was talking about how it’s gonna start raising interest rates.
So for us, long maturity is eight years or more, and we took that long duration and we moved it to intermediate, and we moved more into short. As interest rates moved up, it helped protect our investors, our clients, from this interest rate risk that really hit Silicon Valley. It hit them really hard because they lost 1.8 billion dollars in the valuation of these long-term government treasuries that they owned.
This became public knowledge when they had to disclose that they had to sell these investments to fund the cash withdrawals that their clientele were putting upon the bank. So remember, you know, just like in the movie It’s a Wonderful Life and you see Jimmy Stewart in there talking about when they were doing a run on the bank and you know, talking about the crash of ’29. That money isn’t in the bank branch, it’s not in the vault. It’s invested in other things. And for Silicon Valley, one of those investments was these treasuries and mortgage back. So they needed the money to generate, to give to their depositors. That’s what caused them to disclose the loss, the attempt to recapitalize the bank, and then eventually closing on a Friday afternoon.
And so that closing set ripples through the financial world. And this, let me share some of the stories that I’ve heard since Silicon Valley has closed. I was talking with a business owner and they sell a product and the company they sell through then pays them for the product that’s already been sold. And that company used Silicon Valley Bank. So their payment that was supposed to come out on a Friday when that bank closed, was delayed. Fortunately for them, the Federal Reserve stepped in and the Treasury said, we’re gonna make depositors whole. So they had no relationship with the bank other than the company that they did business with used it. Another example that I’ve experienced is a client was sharing about how their father’s payroll was delayed from the payday on Friday because the company that they work with used Silicon Valley Bank to do their payroll. So when the bank closes, it’s not just affecting the depositors in the bank, it actually affects the financial system and how it goes out in those ripples.
So what the Fed did by saying, Hey, we’re gonna make depositors whole. They were trying to limit that ripple effect that is caused by one bank, then two banks being shuttered.
Now we’re seeing the Fed come out, you know since I wrote my blog a couple of weeks ago, and raise interest rates. And this is gonna put a little bit more pressure on those banks that hold these long-term maturities.
And as I said, we kind of exited that before the interest rate cycle started. Now you have them holding this and it’s coming out more. And how it’s gonna play out within the regional banks is a little bit different.
So is my bank account at risk?
Probably not at this moment. What is a bigger question I see is “How is this gonna play impact the original banks?”
So you’re looking at these small regional banks and we’re seeing depositors take their money out. Bank of America picked up over 5 billion dollars in three days because depositors are moving from small regional to large banks to make sure that their funds are available. Now, these small regional banks actually support small businesses, and that’s where most small businesses’ loans are generated.
The other effect could be that they get the deposits, people start putting money back in, but they now increase the lending standard because they’re at risk greater, which also will create a small effect in the small business world that there’ll be, again, less capital for.
So is my bank at my local regional at risk?
Probably not. Is my account of the large mega bank at risk? Probably not.
But what we’re seeing is the Fed is trying to eliminate the risk to the depositors, which is very important because when one bank stops sending out money, it affects people in different areas. So we’re seeing some change in that, and we’re having people question is my bank solid, which have never questioned it before. And we’ve seen increases of people moving. Now I gotta evaluate my bank. Do businesses now need two accounts? You know, how do I handle that?
And those are the questions that are really helpful when you sit down with your financial advisor to walk you through how you’re being diversified. What is your financial obligation? Am I protected? Are you looking at the $250,000 FDIC insurance? What does that mean if I have money in different banks? Those are really important questions, but they lead to the overall, what is your financial world look like and how best to provide that diversification.
So is banking a concern right now? Yes, but I think the Federal Reserve by ensuring depositors has really eliminated some of that risk, but it’s not gone away at this moment. So that’s the question I’m getting asked. I hope this was helpful. Thank you again for looking at my video blog.
Like this article? Want to learn more about Investing?
Check out our Investment Archiveswhere we’ve compiled helpful articles to help you plan for your future.