Got questions? We have the answers regarding the recent bank failures and their implications for your investments.
Recently, the fall of Silicon Valley Bank and Signature Bank shook the market, leading to a $17 billion loss for Credit Suisse’s bondholders. Over the weekend, news broke that UBS is set to acquire Credit Suisse in a deal valued at $3.2 billion.
We examined how Silicon Valley Bank had to liquidate treasuries at a loss to cover a growing number of depositors wanting their money. The FDIC and Treasury intervened, ensuring that all deposits at these banks would be backed, regardless of amount. Additionally, we shared a special podcast episode featuring Peter Polson, founder of Tiller Money, who experienced a drastic financial shift overnight.
It’s a lot to digest, and you’re probably curious about how these bank failures affect your savings and investments. Let’s address some of your burning questions.
What effect will the bank collapses have on investors?
Those who invested in the failing banks, including stock and bondholders, are unlikely to receive governmental assistance, making this situation dire for them. Initially, markets reacted negatively to the news, though the panic seems to have subsided. Concerns arose over Credit Suisse’s funding needs, especially with First Republic facing difficulties (prompting a $30 billion rescue from 11 banks), which could unsettle investors further if additional banks encounter trouble.
Are investors more inclined to sell shares in mid-size banks?
This trend is already underway. Major banks like JPMorgan Chase (JPM) and Citigroup are seeing an influx of new clients following the collapses. Depositors from smaller banks may choose to move their funds to one of the eight Systemically Important Banks (SIBs) in the U.S., considered “too big to fail.” These banks undergo stricter regulations to ensure stability, with JPMorgan being the largest and regarded as the safest.
Are some tech companies at greater risk of defaulting on payments?
With the government insuring all deposits, funds in the collapsed banks should remain secure, although some companies might face delays in accessing their cash. This could lead to payment processing lag for those lacking sufficient liquidity.
How can you assess the safety of your bank?
As noted by a financial expert, as long as your deposits stay under $250,000 individually or $500,000 jointly at one institution, your funds are insured by the FDIC. If your balance exceeds these limits, you might want to diversify your holdings across multiple banks. This strategy could be beneficial, especially since it’s possible to earn more than 4% on your savings.
Are online banks with higher rates at increased risk of failure?
If your online bank is legitimate and FDIC insured, the same safety regulations apply. Note that Credit Unions are backed by the NCUA, which offers the same protections. Assessing an online bank’s stability hinges on whether they manage their deposits wisely or if they find themselves in a precarious position like Silicon Valley Bank.
Do these bank failures highlight a need to revisit Dodd-Frank safeguards?
“The question of safeguards is significant,” the expert states. “How did this bank end up so mismatched with its deposits and asset values? The 2018 adjustments may have been unwise.” Although Dodd-Frank regulations didn’t cover all potential failures, if Silicon Valley Bank had been under these guidelines, a stress test might have identified its financial issues sooner.
“The Federal Reserve likely didn’t anticipate this,” the expert adds. “However, the Fed has consistently indicated the need for rate hikes to tackle inflation. Silicon Valley Bank should have recognized their vulnerability and adjusted accordingly. They had ample opportunities to do so, but failed to act. Communication has been a key focus during Jerome Powell’s leadership, so this outcome shouldn’t have been collateral damage, although reduced bank profitability might be an acceptable loss.”
