Are my Assets Protected?
By now, most of you have heard of Silicon Valley Bank (“SVB”), the largest unknown bank in the country. The bank fell into FDIC receivership, the first bank failure since 2020 and the second largest US bank failure after Washington Mutual failed in 2008.
Overshadowed by this was Signature Bank, a New York commercial bank that regulators closed over the weekend. The institution fell victim to excess crypto-related deposits and was also experiencing material deposit outflows.
Once people lose confidence in one bank, it doesn’t take much for them to lose confidence in many banks—and for runs to kill even healthy financial institutions. So, regulators had to come up with a plan—and one with enough shock and awe to restore confidence in the banking system.
What happened to SVB is very simple. They took depositor money, invested it in long-term treasury bonds at low interest rates (before 2022) and when rates went up, the value of those bonds went down.
Banks must keep a certain amount of capital (deposits and invested securities) as collateral against the loans they make. When the value of those bonds fell, the ratio of their collateral (the treasury bonds) to the loans fell under a certain level that the Federal Reserve requires.
This scared depositors and they started to pull their money from the bank further exacerbating the problem as that only reduced the ratio further.
Just two weeks ago, KPMG, one of the largest accounting firms in the U.S. gave the bank a ‘clean bill of health.’
Late Sunday evening, the Federal Reserve and FDIC put out a press release on their response plan to prevent further banking contagion. What did it do?
- Silicon Valley Bank was declared a systemic risk to the financial system which enables the FDIC to guarantee all of the client deposits, even those in excess of $250,000.
- Signature Bank was also closed down and declared a systemic risk with all depositors made whole.
- The Federal Reserve would create a new Bank Term Funding Program (“BTFP”), offering loans up to one year to depository institutions that pledged any collateral eligible for open-market operations. Critically, that collateral will be valued at par instead of at fair value, meaning that banks with large unrealized losses on high-quality held-to-maturity assets thanks to rising interest rates will be able to borrow from the BTFP as if those assets had not lost value.
HSBC stepped in and assumed the loan book of SVB – for 1£
Regional banks could be going the way of the dodo. We have had discussions with many clients and that’s when I decided to write this memo to clear up a few things.
If your money is sitting at a small regional bank your capital is more at risk than at a larger bank. That is because the Fed has different rules for those that have been deemed ‘systemically important,’ known as G-SIBs, or Globally Systemically Important Banks.
Those banks are well known: JP Morgan, Citigroup, Wells Fargo, and Bank of America. Those are just the US banks on that list.
Regional bank stocks are being pummeled. Banks like First Republic, Zions Bancorp, Comerica, Fifth Third, Western Alliance, PacWest, and Customers Bancorp are seeing their stocks get cut in half in just a few days.
Is your money protected?
Your money, invested in stocks and bonds, are segregated from broker-dealer assets. What that means is if Schwab were to fail, something that is HIGHLY UNLIKELY TO HAPPEN (I want to stress that!), it has no effect on your account. Your assets are yours. Not Schwab’s and definitely not Schwab’s potential creditors.
In other words, in the unlikely probability that the Schwab broker-deal were to go insolvent, your account is segregated from it and not available to general creditors’ claims.
What else?
Your account is covered by SIPC, Securities Investor Protection Corporation, a non-profit corporation that was setup to protect investments at brokerage firms.
SIPC covers investor accounts up to $500,000 but Schwab has added extra coverage partnering with Lloyds of London to create ‘excess SIPC’, protecting securities and cash up to $600 million.
I get the question a lot, “is my investment account protected at Schwab?”
The answer is yes, far more than at a commercial bank and especially more than a small regional bank.
Clients who have more than $250,000 sitting in a checking account at a small bank should reconsider that strategy. While the Fed has stepped in and made SVB depositors whole, they, and the American people, may get tired of continuing to do so in the future.
There is a solution. US treasury bills have UNLIMITED capacity with Federal Government guarantee. FDIC refers to a simple bank account. Corporations with large cash balances sitting in a checking account should rethink that.
We have been putting business owner clients excess working capital in a corporate account at Schwab. This is a far better idea from both a safety standpoint and a return viewpoint. We have been purchasing risk-free bonds that earn more than 5% for client small business working capital.
An example would be purchasing government sponsored entities that are guaranteed by the Federal Government and state-tax free.
Here is an illustration. The Federal Farm Credit Bank, a bank setup during the depression to support farmers, recently issued a 10-year bond at 6.1%. It is AAA-rated (essentially risk-free) and is state tax free. For those in the top bracket and in Colorado, that 6.1% equates essentially to 6.4%, risk free.
That is far better than the 2.0% you are likely getting in your checking or savings account.
Something to think about. Attached is a brochure from Schwab about asset safety.
As always, we value the trust you place in us!
Sincerely,
Mark J Asaro, CFA
Noble Wealth Management