This banking crisis has me nervous. How bad is it? Should we trust our small regional banks? Where should we put our money?
Widowed and Worried
Dear Widowed and Worried,
As you are, we should all be concerned and paying attention. This is a very real and dangerous economic challenge.
Silicon Valley Bank and Signature Bank are the 2nd and 3rd largest bank failures in U.S. history, topped only by Washington Mutual, which collapsed in the financial crisis of 2008. 94% of Silicon Valley’s deposits were uninsured, as were 90% at Signature. SVB had a concentration of tech startups, and Signature had a significant number of holders of cryptocurrencies. Together, the banks held combined assets of nearly $320 billion.
The assets at SVB were too heavy in long-term treasury bonds that were purchased before the Fed raised interest rates. Their value decreased as investors preferred new bonds that earn higher rates. Rather than analyzing the market value of the bonds, the accounting value gave a false portrayal of the bank’s status. To calm a run on banks, the current administration guaranteed uninsured deposits at both banks, and the Federal Reserve announced a lending program for institutions needing to borrow money to cover withdrawals. Over time, the FDIC fund will have to be replenished, possibly by a “special assessment” on banks that customers will undoubtedly have to pay in fees.
“The principle of sound money was ignored by the Fed. SVB violated principles of diversification and prudence. It set aside its fiduciary duty to steward the assets of others and focus on business, not ideology.” (Jerry Bowyer)
I don’t pretend to be an economist or understand the complexity of the current banking crisis. I do know that the First Republic Bank is also distressed and had to be rescued by its rivals. Credit Suisse, a century-old European stalwart bank, had to be rescued by rival UBS (United Bank of Switzerland) for it to remain solvent. While some are calling for more bank reform and regulation as the solution, the Federal Reserve is working overtime to stop runs on banks and ease the fears of depositors like you and me. By some indications, as of this writing, those measures are working to diminish the fear of a complete banking meltdown.
What To Do with My Money Now?
An in-depth article in Fortune Magazine gives insight into the history of bank failures and some helpful advice on managing your bank accounts. Here are a few tips from my perspective:
- Make sure that your money is in an institution that is FDIC-insured. The Federal Deposit Insurance Corporation guarantees deposits up to $250,000 in checking/saving accounts and CDs—$500,000 for joint accounts. If you have more than that in one place, then open accounts with other banks. Do NOT procrastinate.
- Know the rating of your banks: A, B, C, D. Grades are based on credit risk, duration risk, and portfolio composition. How much do they have in US Treasury bonds and mortgage-backed securities? Fitch Ratings publishes a global heat map of the bank ratings they track. Don’t hesitate to ask your banker for their grade/score.
- If you have retirement accounts, remember to diversify your investments.
- Get your financial house in order. Spend less than you earn, and build emergency savings. Track your spending, and find a budget you will actually use. We have multiple resources on our website. Financial margin creates options and strength during a crisis.
- Don’t panic! Making rash decisions based on fear usually leads to poor results.
- Stay informed. There will be ripple effects from this.
The Economic Finger Trap
One side of our economic challenges can be solved by controlling inflation, which requires raising interest rates. The other side can be controlled by increasing liquidity in our banks, thereby increasing inflation. Some say the Fed will be choosing between generational inflation and another banking crisis in the days ahead.
“A prudent person foresees danger and takes precautions. The simpleton goes blindly on and suffers the consequences.” Proverbs 27:12
The coming days will be interesting indeed. This should be a wake-up call to millions of people, especially Christians. We need to live prepared for any of these possible scenarios.
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