My commentary on Friday stirred some thoughts by many readers and the weekend proved to be a wild one in finance. So, here’s the update as of this morning. Regulators shut down both Silicon Valley Bank (SVB) and Signature Bank over the weekend. Although SVB was relatively unknown to most of the world, it was the second-largest bank failure in US history. Last night, The Fed established the Bank Term Funding Program to address the flight of deposits from banks like SVB. As noted on the Fed’s website, the program will offer “loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral.” To be clear, this facility DOES NOT guarantee bank deposits above $250,000, which is the FDIC insurance limit. What it does do is create more liquidity for banks, which could stem the run. But as SVB customers learned over the weekend, when a bank fails you don’t have immediate access to your cash.
Right now, we are helping clients manage cash and CD balances beyond $250,000 through our treasury management program. Investors want the current 4.7% yield offered by short-term treasuries and the full faith and credit of the US government backing their investment. That is much more attractive than a low-yield risk checking account at the bank or the limited insured coverage offered by CDs.
We have not built our practice over the last three decades on fear and I applaud the Fed’s action last night to inject liquidity. In the end, the Fed has an UNRESTRAINED ability to quash bank runs as they can print money. So, this matter will get resolved. But a direct government guarantee along with high interest as offered by short-term treasuries will route bank checking deposits as noted by SVB. As always, I appreciate the continued trust and confidence.