The impacts of the government stepping in.
KEY TAKEAWAYS
The government set poor precedents by bailing out SVB.
The FDIC's role comes into question.
Nothing is stopping small bank depositors from moving their money to larger banks.
The Fed has a lot to think about before their next meeting on March 22nd.
On Sunday night, the government came to the rescue.
After potential buyers for Silicon Valley Bank (SVB) said, “Thanks but no, thanks,” the Treasury Department, Federal Reserve, and FDIC announced a joint effort to guarantee all deposits and provide troubled banks with the liquidity they need to continue operating as usual.
An initial sigh of relief was followed by the realization that we’re not out of the woods yet. The government solved the problem with an easy solution, but more, longer-term problems came with it.
Poor precedents were set
First, are collateral losses. These banks ran into problems because they mismanaged their capital and lost money. To fix that problem, the government made the banks whole with a loan. Well, every bank has bonds that have lost value; it’s just a matter of to what degree. So, is the government prepared to loan out money to every bank?
To take it a step further, they’re giving banks that mismanaged their capital, access to more money. Give a bank money, and it will use it. Will they use it properly this time? What’s the saying? “Fool me once, shame on you. Fool me twice…”
Next, is the honoring of the FDIC limits. The government guaranteed all deposits – even those over the FDIC limit of $250,000. People and businesses knowingly held cash above the FDIC limits, and they were saved. Why should they care about these limits in the future?
What's the point of the FDIC?
There is about $22 trillion in the US banking system. The FDIC has about $125 billion in assets and a line of credit of $100 billion. That’s a 99% insurance gap. SVB alone had $212 billion in assets.
With the government seemingly always willing to step in and the FDIC’s inability to provide any meaningful protection by itself, what’s the point of this agency?
Has confidence really been restored?
The primary goal of guaranteeing deposits was to restore confidence and prevent bank runs. On the surface, that mission was accomplished, but the perception of risk has shifted squarely on small banks.
Big banks with more strict capital requirements, diversified clients, massive and diversified balance sheets are not at risk of becoming the next SVB. The same can’t be said about smaller banks. Not knowing how much and what kind of capital small banks have, individuals and businesses may now see smaller banks as a risk that they are not willing to take.
Thanks to government guarantees, depositors may not take their money out of the banking system altogether but go from a small bank to a big bank. And that move will have the same impact as a bank run on small banks.
How will the Fed respond?
The Fed meets next week and will announce its decision on any interest rate change on March 22nd. With stubborn inflation at 6% and a resilient job market, the Fed has been setting expectations for not only more hikes but potentially more aggressive hikes.
But that was before these banks collapsed.
Many people have said that the Fed’s policies have led to these banking issues, but I don't see it that way. These banks got into trouble because of a perfect storm that worked against them - the wrong clientele and the wrong collateral at the wrong time.
The Fed’s decision on the 22nd will be telling:
If the Fed thinks the banking turmoil is behind us, then it will hike by 25-50 points.
If the Fed thinks the banking system is on shaky ground, then it will pause.
Conclusion
This topic will continue to dominate headlines for weeks as we see how any spillover effects play out.
For now, the most important thing for you to do is to make sure you’re under the $250,000 FDIC limit in eligible deposits. If you are, then your money is protected regardless of where you bank.
Frank Iozzo, CPWA®
President, Private Wealth Advisor
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