The market has been a bit jittery the last few days and the media has been trying to convince us that we are on the brink of a banking crisis. In the last week or so, two financial institutions that deal heavily with cryptocurrency failed. Another one that deals heavily with tech startups also failed. Frankly none of these failures are surprising. The market for crypto and tech startups has been terrible for over a year and anyone who caters to that space is going to be struggling compared to 2020 and 2021 when Government handouts were flowing like never before. Think of it like a bank that caters to local farmers. If suddenly all the local crops fail, that bank won’t get new deposits and their depositors will withdraw money to cover their bills. Unfortunately, the bank wasn’t just sitting on that money that was deposited. They lent it out and only kept a small reserve to cover withdrawals. If too many people ask for their money at once, the bank won’t be able to pay and will go into receivership. Again, crypto and startups aren’t making money like they did a couple years ago, so deposits by those people have likely mostly dried up and on top of that, they probably are withdrawing more to cover their expenses. Hence it’s not a surprise banks like that would have trouble.
The banks that went into receivership had billions of dollars of uninsured deposits over the $250,000 limit per account and people initially worried they would lose some or all of that money. That is no longer the case as the Government has stepped in to guarantee all of the deposits, even the uninsured ones. They did this in the name of financial stability for the country as they wanted to avoid widespread runs on banks. Keep in mind, you probably had never heard of these banks, which in the grand scheme of things were boutique banks and pretty small. Even so, the Government did not let them fail. I would certainly assume that protection will be afforded to larger institutions should the need arise.
We have had many clients concerned with whether their bank might be the next to fail and I would suggest a couple things. Firstly, make sure you are under the $250,000 FDIC limit in each account. If you are over that number, we have been buying a lot of short term treasuries for people at rates right around 5%. Those are considered the safest investment in the world, even safer than FDIC insured investments. There is also no limit on how much you can invest in those. Secondly, “too big to fail” is still true. I don’t believe the Government will let any big brand name institution fail and have its account holders left with nothing. They may not bail out small banks that don’t impact national financial stability, but companies like Chase for example, I don’t see them letting go. So if you are concerned about your bank, a big bank is probably safer.
The bottom line is that a couple small institutions failed and the Government stepped in in order to stave off a crisis. So as it stands now, we don’t have a crisis and I’m guessing we won’t. In fact, in a weird twisted way, this might be good for the financial markets. The root cause of these troubles was the rapidly rising interest rates as set by the Fed. They have another meeting next week where it was widely expected they would continue to raise interest rates in their fight against inflation. However, they would rather have a little inflation than National financial instability. So this is just one more argument towards slowing or stopping the rate hikes. It may not be a big enough argument, but you can be sure it will be considered by the Fed in their decision making.