Episode 037:
Waking Up to Bank Failures and What It All Means

Whoop It Up! Why even committed non-readers will love Book 1 of "Harry Potter and the Sorcerer's Stone" (in print or try your library’s free downloadable audible version!).

Destination San Francisco: Trust but verify your sources!

Bad Luck Comes In Threes? Josh gives us context for the recent failures of Silicon Valley Bank, Signature Bank and, most recently, First Republic.

Out of Left Field: Why many in the industry and beyond have been surprised by the serious stumbles and bank rescues of recent weeks.

How Banks Work:

• They take public deposits in exchange for some amount of interest (which in the past decade+ has been pegged to historically low interest rates).
• They are tasked with finding investments for that money that will not only earn out the current interest rate but also cover overhead on things like bricks-and-mortar branches, staffing and other bank infrastructure.

How Banks Make Their Margins:

• They charge fees.
• They earn interest in one of two ways:
  • Loan money at rates that exceed the interest rate of return for depositors.
  • Invest in in Tier 1 – risk-free – capital such as U.S. Treasury Bonds.

When Things Went Sideways:

• At the outset of pandemic, banks anticipated massive losses and started to position themselves to weather the panic.
• The U.S. government interceded with a wave of enormous stimulus packages that resulted in an equally enormous wave of unexpected cash deposits.
• Banks suddenly had huge cash balances – and interest to guarantee.
• Because bank loans can’t be made overnight, banks opted to plow funds into U.S. Treasuries whose interest rates were at all-time lows of under 2%.

Bond, U.S. Treasury Bonds – a Refresher!

• Why returns go down when interest rates rise, as they have over the last 18 months. (For more on this topic, check out Episode 19 – “Do Bonds Have a Place in My Portfolio?” – at this link.)
• About the inverse relationship between interest rates and bond rates of return.
• What rising interest rates have meant for banks with huge U.S. Treasury Bond holdings. Their portfolios’ balance sheets started showing a giant loss.

What Happened Next:

• Depositors who had large multi-million-dollar cash holdings (not uncommon in the tech worlds of Silicon Valley, Signature and First Republic banks) began worrying about solvency.
• The FDIC (Federal Deposit Insurance Corporation) covers depositors for balances of up to $250,000 per account, but in the case of tech companies with multi-million-dollar cash balances, this was of little comfort.
• Overnight, customers at the hobbled banks started transferring their balances elsewhere, which triggered a spiral effect.
• The FDIC interceded to cover ALL depositors, regardless the size of their balance, steadying the course for skittish customers at the troubled banks.
• A total collapse was averted.

About the Triple-Threat Conditions That Left Banks Vulnerable:

• Record-low interest rates and a massive infusion of pandemic stimulus cash.
• Subsequent timing of a series of Federal Reserve interest rate hikes.
• Failure to manage risk/hedge against fears triggered by balance sheet losses.

Are We Okay?

• In short: Yes!
• But looking at the safety of your banking institutions is part of risk mitigation and something all retirees or soon-to-be retirees want to factor into their planning.
• Average Joe and Jane retirees are most likely absolutely fine, but without forethought there is the possibility of a huge headache (because securing FDIC reimbursement can take a little time).
• Having an emergency fund is always a key part of retirement strategy.
• You have to weigh everything when allocating your saving and investments.

Let’s Get to Know Josh and Dave! “What do you feel people complain too much about these days?”

• For Dave, what grinds his gears is impatience and rudeness towards people in the service industry – especially restaurant workers.
• For Josh, it’s complaining about other people. Do we really want to live in an “us” versus “them,” blame-game society rather than living life and working together on the 98% of things on which we all agree!?

Dave Relate 2 Retirees … Worried about your bank’s solvency? You may (or may not) want to adopt Dave’s preference for bartering and avoid cash altogether. Josh applauds having alternatives, but at the end of the day it’s all about diversification, risk mitigation – and remembering that our banking institutions are fundamentally sound!