The Banking Turmoil

Your Assets Managed by Our Team

Events over the past few days have been shocking, given the rapid demise of Silicon Valley Bank (“SVB”) and Signature Bank and a potential contagion among regional banks with similar characteristics. It is important to note that our firm does not have any material or direct exposure to either institution or similar institutions.

Distinct from the banking system, your assets managed by our team are custodied at Fidelity. Major custodians, including Fidelity, are governed by a separate regulatory regime that requires broker-dealers to maintain a reserve account independent from bank deposit accounts and kept for the exclusive benefit of its broker-dealer customers. It is also important to note that Fidelity is a member of the Securities Investor Protection Corporation (“SIPC”), which is a non-profit organization established by Congress to protect investors, subject to certain limitations, against the loss of their securities and cash in the event of a brokerage firm's failure. Fidelity and other SIPC members must adhere to standards established by the SIPC. In conclusion, there are measures in place to protect and separate your investment assets from bank-related dynamics.

The Events of Last Week

The current crisis arose in part because even the healthiest banks do not keep enough cash on hand to repay all customers immediately if they demand their deposits all at once. Once concern emerges that a bank may have insufficient capital to cover all depositors who want their money, fear drives people to begin taking out their bank deposits. This fear can turn to full-blown panic as the remaining depositors rush to do the same. In the case of SVB, losses in a long-dated bond portfolio that the bank had to realize to meet unexpected withdrawals sparked the panic that the bank would prove to be insolvent and became a self-fulfilling prophecy.

When a bank fails, depositors are made whole by the Federal Deposit Insurance Corporation (“FDIC”). Traditionally, FDIC’s insurance fund covers deposits up to $250,000, but a systemic risk exception allows the FDIC to ensure that even those with more than $250,000 don't lose any of their deposits. In fact, uninsured depositors have been paid out in full in every bank failure going back decades, with the lone exception of IndyMac in 2008. Also note that, even for claims above $250,000, depositors are entitled to the remaining assets as the bank is wound down. Even in the case of SVB, it is likely that depositors would ultimately have received a significant portion of their cash, albeit with a crippling time lag.

This past Sunday, Federal regulators, the Federal Reserve, the Treasury Department, and other agencies announced that all customers of both SVB and Signature Bank would have access to their money by the beginning of the week. Yesterday morning, it was announced in Britain that HSBC is taking over the British arm of SVB. 

While the depositors will be made whole, the equity and bondholders of the banks are not. These are the risks of investing and why broad-based diversification is so important.

Actions You Can Take to Ensure the Safety of Your Bank Deposits

For cash held at banks, depositors should keep cash below $250,000 in each account that is Federally insured. There are bank programs that can spread cash among various institutions if keeping cash over the insured amount is essential. By using these programs and putting up to the FDIC limit at different banks, a saver can hold amounts well in excess of $250,000.

Titling accounts differently can also increase the amounts insured. For example, $250,000 in a Transfer on Death account and $250,000 in Trust would each be insured up to $250,000.

Still, with interest rates hovering around 4%, we advise that cash only be held when it is needed in the short term. Generally, excess cash should be invested. Indeed, short-term government treasuries, such as T-Bills, are backed by the full faith and credit of the US government, allowing for both safety and income. 

Conclusion

Events like these spawn volatile markets. Markets, however, are quick to incorporate them and move on. If you’ll recall, the S&P 500 lost nearly half its value during the global financial crisis in 2008 but fully recovered within two years, then proceeded on a historic decade-long run. The current banking turmoil should not cause long-term investors to panic or lose sight of their goals.

Please feel free to contact us at any time. As always, we are here for you - to offer guidance, answer questions, and calm concerns.

Warm Regards,

Tonia, Barbara, Adriana, and Vrunda
The Kaminsky-Silverman Group

Disclosures and Definitions

Investors cannot invest directly in an index. Indexes have no fees. Historical performance results for investment indexes do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment management fee, the occurrence of which would have the effect of decreasing historical performance results. Actual performance for client accounts will differ from index performance.

S&P 500 Index represents the 500 leading U.S. companies, approximately 80% of the total U.S. market capitalization.

Dow Jones Industrial Average (DJIA) Is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.

The Nasdaq Composite Index (NASDAQ) measures all Nasdaq domestic and international based common type stocks listed on The Nasdaq Stock Marketand includes over 2,500 companies.
MSCI World Ex USA GR USD Index captures large and mid-cap representation across 22 of 23 developed markets countries, excluding the US. The index covers approximately 85% of the free float-adjusted market capitalization in each country.
MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets (as defined by MSCI).  The index consists of the 25 emerging market country indexes.
Bloomberg Barclays US Aggregate Bond Index measures the performance of the U.S. investment grade bond market. The index invests in a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States – including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities, all with maturities of more than 1 year.

Bloomberg Barclays Global Aggregate (USD Hedged) Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging market issuers. Index is USD hedged.

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