Laughing To The Bank: An Amusing Outlook on Recent Banking Blunders

You can't help but chuckle at the recent banking fiasco involving several large U.S. banks, including Silicon Valley Bank (SVB) and Signature Bank. These failures led to some serious side-eye 😒 at the U.S. banking system.

As if that wasn't enough, UBS and Credit Suisse decided to cozy up with a merger, fueling even more concerns about the banking sector. Hold onto your account statements, folks—it's been a wild ride.

Assets and Liabilities: A Match Made in Bank Heaven

Banks have a unique love affair with assets and liabilities. You see, when you deposit money in the bank, it becomes an asset for you and a liability for the bank. So, what do banks do with all those deposits? They invest them in loans and bonds that are supposed to be safe from credit risk.

But when interest rates started rising over the past three years, the value of these bonds took a nosedive, causing the perfect storm that led to SVB's demise.

The Curious Case of SVB's Depositors

“When you deposit money in the bank, it becomes an asset for you and a liability for the bank”

SVB wasn't your average bank. Their depositors were early-stage companies burning through cash faster than a paper bill on a bonfire. This peculiar structure meant that over 80% of SVB's depositors had balances above the $250,000 FDIC insurance limit.

As cash was withdrawn almost as fast as it was deposited, the trickle turned into a flood, ultimately sinking SVB on March 10.

"Is My Money Safe?" And Other Pressing Questions

The SVB debacle has left clients wondering whether their assets are safe with other custodians, such as Schwab and Fidelity. Fear not, for we believe these institutions are not at risk for the same type of failure.

In response to SVB's collapse, the government has set up a Bank Term Funding Program (BTTP) facility to offer loans to banks in exchange for high-quality collateral, which should help fortify the banking system. So, while we might see additional cracks in the economy, we don't expect a 2008-like crisis.

A Friendly Reminder: Check Your Insurance

It's always a good idea to make sure your cash sitting in bank accounts is insured. Banks typically offer FDIC insurance up to $250,000 per insured bank per account holder. If you have uninsured deposits, consider alternatives such as U.S. treasury bonds or money market funds.

Market Madness: A Roller Coaster Ride

Despite the bank troubles, 2023 started with a reprieve from the pain of 2022. Most major asset classes were positive for the quarter, and the Bloomberg Aggregate Bond Index was up 3%. However, commodities dropped 5.4%, giving up half of their 2022 gains.

The Future Is... Uncertain

The Federal Reserve has been raising rates aggressively over the last 12 months, trying to slow inflation and the economy. While SVB's failure was an outlier, we're likely to see more economic hiccups as the Fed continues to tighten its grip.

Investing with a Smile: Strategy and Diversification

As we monitor developments in the banking system and the economy at large, it's important to maintain a disciplined approach—neither panicking nor taking excessive risks.

Client portfolios should remain broadly diversified, prepared for a wide variety of market outcomes influenced by the Fed, the banking sector, and companies' ability to deliver on earnings expectations.

So, let's keep an eye on our bank accounts, invest wisely, and remember to laugh (to keep from panicking) as we navigate this ever-changing financial landscape.