News and Commentary

Does the Recent Turmoil in the Banking Sector Impact My Deposits with Provenance Wealth Advisors? By Todd A. Moll CFA, CFP®, IAF

The recent collapse of regional banks Silvergate Bank (SIVB), Signature Bank (SBNY) and Silicon Valley Bank (SVB) has sent ripples through the banking sector and fanned talk of a U.S. banking crisis. While the talk of widespread contagion may be understandable due to the memories of the 2008 financial crisis, it is important to put the recent events into perspective.

What Happened?

The three banks mentioned above have focused heavily on providing banking services and financing to entrepreneurs and businesses in the technology and cryptocurrency sectors. In addition, the 2020 and 2021 COVID relief stimulus brought billions of dollars of deposits to the banking sector. Taking SVB as our example, as deposits far outstripped new loan demand, SVB invested those deposits into debt securities such as bonds. Once bonds are purchased, banks can then designate them as either “available for sale” (AFS) or “hold to maturity” (HTM).

According to Michael Cemblast of JP Morgan’s “Eye on the Market” SVB was one of the banks that extensively relied upon HTM treatment of its growing securities portfolio. Since 2019 AFS book grew from $14 to $27 billion, while it’s HTM book grew from $14 to $99 billion. Most of these securities were longer-term bonds with high sensitivity to interest rate changes.

For SVB, a bank with a very heavy depositor base in Silicon Valley, the recent slowdown in the technology sector caused its customer base to withdraw funds. As more withdrawals took place, the bank had to sell its HTM securities. That’s all fine, but selling HTM securities requires portions of the portfolio to be marked down to current values and losses to be recognized (remember bond values are much lower than where they were from 2019 to 2021). This markdown can cause banks to need to raise capital (i.e., issue new stock or take in new investment) to meet required banking liquidity and capital ratios, thereby spooking depositors and causing run on deposits and a vicious spiraling effect. This was the case for SVB.

Should I be Worried?

While any bank failure is cause for concern, it is important to recognize the unique niches that SVB and the other banks mentioned served. Silvergate served the cryptocurrency markets almost exclusively and was significantly impacted by the collapse of the cryptocurrency exchange FTX. SVB had very little retail deposits and served primarily the venture capital and tech corporate deposit base. In addition, they were extremely aggressive in the types of securities they purchased with their excess deposits and the bookkeeping of those securities. Putting the uniqueness of SVB into perspective is the following chart from Piper Sandler.
 

Source: S&P Global and Piper Sandler

A much different picture than your standard bank. So, these instances are very specific to the banks in question.

As far as bank health goes, as of 2022, U.S. bank tier one capital ratios as a percentage of risk weighted capital has grown from 8% in 1991 to 14% in 2022.1 This illustrates the continued strength of the sector compared to previous years. In addition, banks noted as “systemically important” must undergo periodic stress tests by the Federal Reserve. Of course, when the Fed raises interest rates, cracks begin to appear in the more risk-seeking areas of the economy. But the speculative concerns that existed across the wide-ranging aspects of the banking sector in 2008 are not in place today.

Are My Deposits at Risk?

1)   Unlike the banks mentioned, your investments with Provenance Wealth Advisors and Raymond James are not held at a bank. Rather, they are held in investment accounts that are not on a bank balance sheet. Even in the event of a bank failure, your securities are yours. However, this does not apply to your cash positions, so additional protections are in place for those.

2)   Raymond James Bank Deposit Program (RJBDP)*² With the RJBDP, un-invested cash is deposited into interest-bearing deposit accounts across up to 30 banks providing eligibility for up to $3 million in Deposit Insurance coverage ($6 million for joint accounts of two or more) by the Federal Deposit Insurance Corporation (FDIC)

3)   Cash deposits can be invested in Money Market Mutual Funds (MMMF), which as securities, do not fall under a bank balance sheet and are therefore not at risk of bank failure. In addition, they are not assets of the sponsoring financial institution that manages the fund. Keep in mind, MMMF may or may not be right for you, so speak to your PWA representative about them.

In Summary

While the unique cases of SVB, SBNY and SIVB may be unnerving, we do not feel that they represent the tip of the iceberg of another financial crisis. It is not unusual for the Fed rate hike cycle to uncover cracks in the riskier sectors of the economy. However, with the help of your PWA advisor, creating a thoughtful plan and a sound strategy, you can feel secure in the knowledge that your assets are well protected.

Update:

In response to the threat of deposit withdrawals leading to liquidity issues at banks, the Federal Reserve on Sunday announced the creation of a new Bank Term Funding Program (BTFP) to be accessed by all U.S. depository institutions. The new program will offer loans up to a year in duration with assets that are eligible for Federal Reserve Bank open market operations as collateral to access the facility. The Fed’s program will be backstopped with $25 billion from the Treasury’s Exchange Stabilization Fund (ESF), which the Fed at this stage does not foresee needing to be tapped. The action by the Fed with full coverage for uninsured depositors at SIVB removes some near-term uncertainty about the fate of depositors and will provide a degree of confidence to markets that regulators will act to stem the spread of deposit outflows in order to avoid a systemic event.

The Federal Reserve and the FDIC, while consulting with the President, has used a “systemic risk exception” to fully insure the deposits of SIVB and SBNY. At the time of writing, the federal banking regulators are still working on a sale of these banks, but according to press reports, have begun an auction process. Any cost of fully insuring these deposits will come from a special assessment of FDIC insured depositories – which will be a hit to industry earnings (the FDIC was already in the process of increasing insurance premiums to shore up the Deposit Insurance Fund). Equity holders of the two banks are now unsecured creditors and management teams have been removed. These actions will allow the regulators to claim that there were no bailouts and they moved to secure the safety and soundness of the financial system from further contagion.
Sources:
  1. JP Morgan
  2. Raymond James
About the author: Todd A. Moll, CFP®, CFA, AIF is a director and chief investment officer with Provenance Wealth Advisor (PWA), an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs and a registered representative with Raymond James Financial Services. For more information, call (954) 712-8888 or email info@provweath.com.
Provenance Wealth Advisors, 515 E. Las Olas Blvd., Ft. Lauderdale, FL 33301 (954) 712-8888.
Todd A. Moll is a registered representative of and offers securities through Raymond James Financial Services, Inc., Members FINRA/SIPC.
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