Plancorp's Response to Recent Banking Industry Events

Bottom Line Up Front: 

Plancorp and our clients’ direct exposure to Silicon Valley Bank is minimal. While this may sound like 2008, systematically important banks are better capitalized and regularly stress-tested to avoid this from becoming a domino effect. Regardless of safety protocols, we proactively work with clients when possible to stay advised of the FDIC insurance limits  when dealing with cash assets and are staying on top of the latest updates and recommendations with our industry partners including Schwab, TD Ameritrade and Fidelity. We see no direct action needed by clients at this time, but understand it can feel uneasy.  

Here is a set of frequently asked questions we’ll be keeping updated as more information becomes available: 

What is Silicon Valley Bank? 

Silicon Valley Bank was a regional bank with a large presence and focus on the tech/start-up/venture capital world.  It loaned significant money to the VC world and often made deposit requirements on their loans. 56% of its loan portfolio was to VC & private equity firms. It also had significant loan portfolio holdings in growth stage start-ups, technology & healthcare companies as well as mortgages to its customers.  SVB also took equity positions in its’ clients in addition to its loan portfolio, making it unique in the banking industry. 

What happened? 

There’s a lot we still don’t know.  From what we currently understand, there was some concern about SVB’s liquidity in recent days/weeks that ultimately resulted in a classic “Bank Run” that peaked last Thursday (March 9).  This resulted in the FDIC taking receivership of the bank on Friday, marking the 2nd largest bank failure in the United States, behind the failure of Washington Mutual in 2008.  

It appears that as the technology & VC industry saw a downturn, incoming deposits significantly slowed for SVB along with an increase in paying back depositors as they requested withdrawals for payroll, investments, & other business activity.  With the amount of withdrawal requests, SVB had to quickly liquidate their long-term investments (held in treasuries & agencies) and that resulted in significant mark-to-market losses due to rising interest rates (when assets previously valued at their expected future value are marked at today’s value). To solidify its capital position, SVB announced the mark-to-market losses, as well as a stock sale to raise capital last Wednesday. It was following these announcements that the “bank run” accelerated. 

SVB was extremely unique in the banking sector, not just because of its clientele – approximately 93% of their deposits were NOT FDIC insured.  The average bank has about 50% of their deposits as fully FDIC insured. 

What did the FDIC do? 
On Sunday night the Treasury, the Federal Reserve and the FDIC announced a set of programs to help contain fallout from the SVB collapse. First, they used the systematic risk exception available to them through Dodd-Frank to guarantee all deposits of SVB.  Those are liquid and available to customers as of Monday morning (March 13, 2023).  

Second, the Fed eased access to its discount window.  The discount window allows banks to obtain more liquid funding from the fed to repay depositors withdrawals as needed as the low interest rate environment of the last decade changes the equation for bank cash flow.  

Finally, the Fed and Treasury announced a new bank funding facility that lends banks capital against their treasury & agency holdings at a par value, avoiding the mark-to-market loss concerns moving forward. These programs are designed to provide confidence to depositors that banks have the capital needed to satisfy any withdrawal request, ideally containing this problem. 

What are the FDIC Insurance Limits? 

You’ve likely become familiar with the blanket $250,000 guarantee on deposits through the Federal Deposit Insurance Corporation, but there are some fluctuations in that limit like for joint accounts with spouse and child beneficiaries that may qualify for $750,000. We always work with clients to stay advised of FDIC limits with their cash deposits precisely for this reason. For more from the FDIC, see here. 

Were other banks impacted? 
The short answer is yes, but they were similarly unique situations. The FDIC also took receivership of Signature Bank in New York on Sunday night. Signature Bank was unique in the banking space because of a concentration in cryptocurrency – in 2021 approximately 30% of its holdings were in crypto. The program backstopping all deposits for SVB also applies to Signature Bank.  

Silvergate Bank which had approximately 90% of its assets in cryptocurrency, and was significantly smaller than SVB or Signature, also failed last week.  

It appears that other regional banks are taking significant stock downturns, including First Republic Bank and PacWest Bank.  While that may sound alarming, it’s important to remember that large banks, which are subject to significant stress-testing and regulation under the Dodd-Frank Act (JPMorgan, Bank of America, Wells Fargo, Morgan Stanley, etc.), do not appear to be suffering extremely large losses to their stock price. Smaller, low deposit banks also do not appear to be suffering significant stock downturns.  

Are my cash assets at Fidelity, Schwab, or TD Ameritrade safe? 

Investments held at TD, Schwab and Fidelity are held in brokerage accounts at the Broker Dealer. Each account is held separately and not comingled with assets of the Broker Dealer or any related bank. Cash held in brokerage money market funds are invested via a manager in ultra short-term securities, with a significant holding in very short duration Treasuries. Any cash held in Schwab Bank accounts are insured up to FDIC limits.  

For example, more than 80% of client cash held at Schwab Bank is FDIC insured, numbers in line with other major players like TD Ameritrade and Fidelity. This is in stark contrast to Silicon Valley’ s ratio of 7% FDIC insured. Plancorp remains in regular communication with TD, Schwab and Fidelity and are confident in their respective financial positions. 
 
More information can be found in a release from Schwab today. 

Other Notes 

Plancorp continues to believe in diversification, SVB is a good example of the value of diversification.  SVB had a large focus on serving a narrow customer base subject to volatile swings in cash flow, performance and valuations.  When that customer base and it’s industry began to experience a downturn, SVB was affected significantly. 

To reiterate, Plancorp’s exposure to SVB appears to be minimal.  StoneCastle has clarified it does not have exposure to SVB or Signature bank and Flourish did not place any client funds at Signature Bank through its program. 

It is extremely hard to predict exactly what will happen going forward, so be wary of people promising certainty. Rest assured, we at Plancorp continue to monitor this situation closely and will keep you updated. Please don’t hesitate to reach out to us with any questions or concerns.