Events over the past few days have some investors nervous. But, of course, bank runs tend to do that. They are, after all, built on fear of fear itself. So news of the rapid demise of Silicon Valley Bank (SVB) and Signature Bank has rattled markets.
Even the healthiest banks do not keep enough cash on hand to repay all customers immediately if they demand their deposits all at once. Bank runs are insidious because they can become self-fulfilling. Fueled by fear, people begin taking out their bank deposits. As word gets out, fear may turn to full-blown panic as the remaining depositors rush to do the same before they are too late and the bank cannot meet their immediate demands.
When a bank fails, depositors are made whole by the FDIC insurance fund. Traditionally, the insurance only covers deposits up to $250,000, but a "systemic risk exception" allows FDIC to use the Deposit Insurance Fund 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).
On Sunday, Federal regulators — the Fed, Treasury Department, and other agencies —announced that all customers of both SVB and Signature would have access to their money today. On Monday morning, in Britain, it was announced 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.
For investors worried about the safety of their assets, their investments at major custodians are held separately and not comingled with assets of any affiliated Bank.
These types of events spawn volatile markets, and we should expect to see that. However, it should not cause long-term investors to panic or lose sight of their goals. These types of events happen, and markets 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 went on a historic decade-long run.
As always, we at Symmetry are here to offer guidance, answer questions, and calm fears (as best we can).