A guest blog post by Matthew S. Clement, CFP®, AIF®. Matthew is the President of Emerald Retirement Planning Group, Inc., located in Stony Point, NY
First, an introduction:
Regulators seized the assets of Silicon Valley Bank (SVB) on Friday, March 10. There was a “run on the bank” because depositors were anxious about the overall health of the bank. This represents the second-largest bank failure in the U.S. and the biggest since 2008. Signature Bank of New York was also taken over by regulators this past weekend, and in their case, it was a combination of factors, including an outsized investment in digital assets such as cryptocurrency.
On Sunday, the Treasury, Federal Reserve, and Federal Deposit Insurance Corporation released a joint statement mapping out their approach. They assured depositors at these banks that they would have access to all their money. The Federal Reserve and Treasury Department took the extraordinary step of designating SVB and Signature Bank as a systemic risk to the financial system, giving regulators flexibility to backstop the uninsured deposits. Regulators hoped that by protecting these deposits, they would bolster confidence in the banking system.
Next, how does this happen?
If a bank is narrow in its scope, its risks are elevated over banks with a broader scope. Areas of specialization/focus can include any of the following:
- Region of the country.
- Industry/sector of clients served, both on the deposits side and the loan/investment side.
- Types, quality, and diversity of loans/investments.
- Average size of accounts, and whether those values exceed FDIC protected limits.
- Size of the bank overall, and level of reserves relative to its size.
In the case of the two aforementioned banks, without getting into the explicit details or numbers involved (which are either changing constantly or limited in reliability), we can say broadly that they were both regional, catered to a narrow base of clients, made loans and investments that were narrower and of higher risk than the industry average, and had account balances where approximately 90% of bank assets were above FDIC protection limits.
Now, how does it affect you?
In short, it should not have any direct bearing on any bank account holder with less than $250,000 per account type.
But here’s some more detail. Primary account categories include individual, joint, retirement, and trust accounts, among others, and each person is protected up to $250,000 per account type, so if two spouses share a joint account with $500,000, each has their own individual account of $250,000 each, and each has a separately named trust account with $250,000 each, they have a total of $1,500,000 in that one bank but are still protected on ALL of it.
There are reasons why having that much money in bank products may not be a good idea, but FDIC protection of the money – the guarantee that you will receive 100% of it back in the event of a bank closure – is not one of those reasons.
And what about investment accounts such as those held through custodians like Cetera and Pershing, or via 529 plans and annuity companies? The cash holdings of those accounts will often be FDIC insured, but the remaining holdings—mutual funds, ETFs, stocks, bonds, etc., are not protected by FDIC provisions and never have been. The values, and protections, of those investments are based not on the ongoing existence of the custodian or asset management company, but on the underlying investments themselves.
Here’s a real-life example: I have a Pershing Roth IRA, as you might expect. One of the holdings in that Roth IRA is the iShares Core S&P 500 ETF. The largest holding in that ETF this past week was Apple stock, followed by 504 other large US companies. If next week, iShares and its parent company Blackrock went bankrupt in an isolated event, how much would that affect the value of my ETF? Well, Blackrock is one of the 505 holdings within the fund, representing approximately 0.3% of the total value of the fund. My ETF value from Blackrock declining to $0 would, all else being equal, also decline by 0.30%, or $3 for every $1,000. My other eight or nine ETFs, which do not own Blackrock at all, would be unchanged (yet one more reason for segment diversification).
But doesn’t Blackrock/iShares run the ETF? Yes, it does, but within a day or two, another entity would be running the ETFs instead, and the same 500+ entities that comprise the ETF would continue unaffected. The fund might change names, but that has no bearing on its underlying value.
What if Blackrock went out of business? Same thing. What about Pershing? Same thing—momentary jostling of accounts between entities and everything is fairly soon enough back in action. Once more: The third-party entities involved in the management and supervision of your investment accounts are NOT what you own. You own the hundreds, or more likely thousands, of underlying company stocks (and maybe some bonds) that comprise the funds themselves. Your diversification is, in this particular case as in others, your protection.
Yes, this banking mini-crisis will end. We just don’t know when, or if it gets any worse before then. Moreover, I would never wish to imply that the recent issues with regional banks, or more notably with the Federal Reserve rate hikes relating to inflation, will not have an impact on your investments or on your financial plan. Surely they have, most directly via a recent past-tense increase in cost of living. Whether there are future increases in cost of living we cannot yet know; we need to wait and see. Impact may also be felt in a temporary decline in investment prices, perhaps similar to 2022, perhaps more, and always perhaps the opposite—continued growth. For this too, we cannot know in advance, and because of this, we must act from a pre-determined written plan rather than re-act from recent news. In this fact there has been no change. The issue of the day – the proverbial apocalypse de jure – will always be something, and often something different than the last one. Yet they are always eventually muffled, and then transcended, by the longer-term fundamentals upon which we base our planning and decisions. Stay connected to those fundamentals, with our help, and avoid the ever-present temptation of believing that “this time is different.”
I welcome any feedback or questions. Please do not hesitate to reach out.
Matthew S. Clement, CFP®, AIF®
President, Emerald Retirement Planning Group, Inc.
18 Liberty Square Mall, Stony Point, NY 10980
Phone (845) 942-8578 • Text (845) 263-3526 • Fax (845) 689-2051
The views stated in this news item are not necessarily the opinion of Cetera Advisors LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
Investment Advisor Representative offering advisory services and securities through Cetera Advisors LLC, a Broker-Dealer and Registered Investment Advisor, Member FINRA/SIPC. Cetera is under separate ownership from any other named entity.