Are the Banks Failing? What Our Clients Should Know.
With the recent headlines about the banking system, and the collapse of Silicon Valley Bank (SVB) over the past few days, we at BTG wanted to take this time to explain the issue, alleviate any concerns around the safety and protection of your accounts, and provide some commentary on the markets’ response.
SVB Collapse: What Happened?
Simply put…there was a run on the bank.
SVB is a regional bank whose biggest customers are tech start-ups and crypto-related companies. Leading up to 2022 these companies did extremely well and needed somewhere to park all their cash. They parked it at SVB and deposits grew quickly and enormously. SVB, now flushed with cash, invested those deposits into Treasury bonds to earn income (which is one of the ways banks make money). However, those Treasuries were only paying 1-2% when they bought them. With rates now at 4-5%, the value of those Treasury bonds were down substantially.
Fast forward to 2023 – tech startups and crypto have gone sour. Deposits have slowed and the withdrawals demands have increased, which SVB needs to meet. When SVB announced last Wednesday that they would have to sell much of their Treasury portfolio and take a $1.8 billion loss to meet customers’ withdrawal demands, it sparked panic among SVB’s biggest customers and they began to withdraw their money in droves. By the weekend, SVB was insolvent and federal regulators had to step-in.
Protection of Your Accounts with BTG:
While BTG is intentionally a small Firm, our custodian (Your money holder) is not.
We at BTG recognize that we are not a household name, nor do we ever plan to be! We believe that our smaller size is actually an advantage, as it puts us in a position to do our best quality of work for our clients. However, during times like these in which banking institutions are in question, it’s important that we reiterate the structure of how our clients’ accounts are custodied.
At BTG, we do not custody your accounts. Instead, we use a custodian (with that household name!). Our selection of this custodian was done with tremendous due diligence and thought. The custodian is a lot like BTG in the fact that it has both the small boutique style with great service and flexibility, but also the iron clad safety and history that we require for our clients assets. Our custodian is Shareholders Service Group/Pershing LLC, and they hold your accounts. Shareholders Service Group is a local , San Diego, CA company that provides tremendous service and resources to us the advisor. The actual money holder or custodian, Pershing LLC, is a subsidiary of Bank of NY Mellon, which is the world’s largest custodian with over $45 trillion in assets under custody. To read more about the financial strength and protection of assets at Pershing and Bank of NY Mellon, please see the attached PDF entitled, “Asset Protection at BTG.”
The Difference Between Banks and Brokerage Protection:
You have likely heard of FDIC insurance, or maybe even NCUA insurance. This is what banks and credit unions subscribe to in order to protect their clients' cash. The typical structure is $250,000 per social security number at the bank, and that amount is protected should the bank go under. Deposits above this amount can be at risk, should something happen to the bank. Now, with a brokerage account, the custodian, like Pershing, Schwab, or Fidelity for example, things are quite different. The protection is called SIPC. It also protects against the firm going under, like the FDIC does, but assets invested in a brokerage account have quite a different structure. When you own a security (stock, bond, mutual fund, ETF, etc) you own an asset. For banks, your cash is just an item on their balance sheet. For this reason, many of our higher net worth clients choose to house higher dollar amounts of their low, to no risk portion of their portfolios, at a brokerage. We often buy assets like Treasury bonds, or multiple CD’s inside of one brokerage account. The insurance protection can actually be much higher with a brokerage account versus the traditional banking options. This is a great topic to be discussed with your financial planner to ensure you have the proper setup. When it comes to investing, the risk should be in the change in value of your securities, not fear of the money holder itself having issues.
Financial Markets’ Response:
So far, the response has been contained.
Outside of the banking sector, the majority of stocks have held up quite well. Federal regulators have been quick to step-in to assure confidence to SVB’s depositors and to the entire banking institution as a whole. Interest rates and the estimates for future rate increases have both come down. This in fact might be the reason as to why the stock market continues to hold ground. It’s now possible the Fed holds off on another rate increase this month – something that was a near slam dunk a week ago.
Disclosure: Bridge The Gap Retirement Planners LLC (BTGRP) is an Investment Advisor registered with the States of CA/AZ. All views, expressions, and opinions included in this communication are subject to change. This communication is not intended as an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services. Any information provided has been obtained from sources considered reliable, but we do not guarantee the accuracy, or the completeness of, any description of securities, markets or developments mentioned. We may, from time to time, have a position in the securities mentioned and may execute transactions that may not be consistent with this communication's conclusions. Our current disclosure brochure, Form ADV Part 2, is available for your review upon request, and on our website, btgretirementplanners.com. This disclosure brochure, or a summary of material changes made, is also provided to our clients on an annual basis.