Should I Be Worried About My Local Bank?

On Friday, March 10th, it was announced that Silicon Valley bank, the nation's 16th largest bank, had failed.  The news increased anxiety on both Wall Street and Main Street.  Today we discuss what caused the failure. We offer our opinion about whether or not you should be worried about your local bank. Lastly, we talk about Charles Schwab and how this could impact the custodian of your accounts.

Watch Now:  Should I Be Worried About My Local Bank?

Timeline

• 0:00 – Intro
• 0:33 – What’s going on with Silicon Valley Bank
• 0:55 – How does a bank fail?
• 1:27 – What happened to SVB
• 4:48 – It is unlikely this is a major problem
• 5:52 – Local banks tend to be very conservative.
• 7:31 – Your local bank is strictly regulated.
• 10:12 – The payroll problem
• 12:28 – The failure hurt bank stocks.
• 13:50 – Should I be worried about the money on deposit at my local bank?
• 16:00 – No such thing as risk-free
• 16:36 – How our new custodian, Charles Schwab, is addressing these concerns.
• 19:09 – Final Thoughts
• 19:54 – Outro

How does a bank fail?

Banks have regulatory requirements to hold a certain amount of assets to be able to meet their liabilities. Your deposits are liabilities to the bank, and they need to be able to return your money when you request it.  If they don’t have the assets to make depositors whole, it is a major problem.

What happened to SVB?

There are layers of complexity in this situation.  A sudden demand from their customers for their money—aka a bank run, complicated accounting issues, questionable investment decisions, lack of diversity, and mismanagement all contributed to their demise.  (For a very detailed description, check out this blog post from Net Interest)

Is this going to be a widespread problem? 

Most of what we have read and discussed with others indicates that these issues will be contained.   The problems will impact banks that lack diversity and make large bets on long-term US treasuries.

Should I be worried about the funds deposited at my local bank?

In our opinion, No.  

1.  Most local banks are very conservative.  They make risk management a priority.
2. Banks are strictly regulated.  It is an industry with very black-and-white standards, especially for smaller banks.
3. FDIC coverage.   If your deposits are under the FDIC limits, insurance exists to protect you from these types of problems.  That limit--$250,00

Bailing out the depositors

The Federal Reserve stepped in and bailed out all SVB depositors.  One of the more interesting justifications for doing so centered around the account of a payroll company.  According to the Washington Post, had the backstop not been put in place, one million people would not have been paid.  But protecting those workers meant they would also be protecting the billionaires who had more than the FDIC limits deposited at the bank.

A Word on Charles Schwab

Going forward, Charles Schwab will be the primary custodian for our clients' accounts.  There is also a Charles Schwab Bank.  Despite the share price of Charles Schwab (SCHW) dropping by 38% in two days, the company does not expect similar impacts to their banking business.  

Schwab released this statement regarding the events that surrounded the bank failures.

Still Have Questions?   Reach out to us…

Appearing in this episode:

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