Waking Up to Bank Failures and What It All Means
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What is Episode 037 All About?
It’s been a bumpy ride for banks lately – but context is everything! That’s why Josh Bretl, our fearless host and founder of FSR Wealth Strategies, is here to decode the collapse in recent weeks of Silicon Valley Bank, Signature Bank and First Republic.
When we talk about these bank failures and the role of the FDIC (Federal Deposit Insurance Corp.) in bailing them out, it’s important to understand the customer base of the institutions involved.
You’ll learn on this episode of Retirement Equals Freedom about the three key factors that have driven topsy-turvy ledger sheets and exposure for banks in general – but most especially among those serving primarily high-tech players holding lots of cash.
Interest rates at an all-time low converged with pandemic stimulus checks that produced a massive influx of cash deposits. What happened next (you’ll have to tune in!) had everything to do with how those deposits and other cash holdings were invested and what occurred when interest rates started to rise.
Some banks – like those that specialize in serving the tech industry – have proved especially vulnerable. Risk mitigation is critical for just such situations, explains Josh, but you can rest assured that the banking system overall is fundamentally sound.
And remember: any account with a balance of up to $250,000 will always be covered by the FDIC.
It’s been a wake-up call for many of us who have been in an economic “dream state” the past 15 years, but there are fortunately lots of great financial planning strategies to help you navigate our new economic realities.
Josh and his Co-Host, Dave Schmidt, also leave you with some bonus advice to help manage the stress: Be kind. Go out there and live your life. We can make the world a better place!
Want to understand why it’s actually a bad thing for yields on investment vehicles like U.S. Treasury Bonds when interest rates go up? Listen to Episode 19 of Retirement Equals Freedom: "Do Bonds Have a Place in My Portfolio?"
If you’re feeling queasy about the recent banking roller-coaster, now may be the time to chat with Josh directly. He and the team at FSR Wealth Strategies are dedicated to ensuring your personal finances are safe – and growing! Schedule your complimentary 15-minute call by clicking on the big green "Schedule a Call" button at the very top of this page.
Finally, here are a few fun links to explore if you’d like to dive into our podcast community:
Arm wrestling. Big legs. Harmonica. Be kind.
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!
“(These bank failures) seemed to come on quickly, out of the blue … but banks in general are so strong that even (Dave) working there wouldn’t bring one down.” ~Josh
“There was a massive cash inflow to banks (as a result of federal stimulus checks during pandemic). Bank balance sheets – the amount of cash sitting on a bank balance sheet – went up ten-fold.” ~Josh
“When interest rates rise, the value of bonds mathematically has to fall.” ~Josh
“All banks in the country are going through pretty much the same thing, but some of them have hedged their risk better … or they don’t have nearly the level of uninsured deposits.” ~Josh
“Bank failures are always out there, but this was kind of a unique one … I don’t think we’re done seeing the end of this, but I think for the most part our financial institutions – banks in general – are extremely well capitalized.” ~Josh
“What adds a level of fear is just how much uncertainty and volatility there is in general with our financial institutions. How does this affect everybody – the normal people?” ~Dave
“Banks are still strong. Things are in good stead out there, but you still want to monitor that because this could happen to a retiree.” ~Josh
“People who are losing money are the giant corporations, the giant investors, the hedge funds. But for the Average Joe, the average client that we work with, what it could mean is a giant headache … Just because the FDIC insures you doesn’t mean your money is back in your account overnight. It might take a few weeks. That’s why having those emergency funds becomes really important. And spreading out your wealth.” ~Josh
“Overall (these bank failures) were kind of a good wake-up call for people to get back to fundamentals … It’s been a wake-up call out of the dream state that was the last 15 years.” ~Josh
“People are all going through the same stuff and if we would not complain or judge but instead just sit and listen, I think we’d have a whole new world out there.” ~Josh
“Retirees, soon-to-be retirees and just everybody out there who likes money: I can relate to you with these bank closings! In fact, that’s why I just choose not to have money!” ~Dave
“It’s always better to have more money than less, but having too much cash can hurt – and not because of bank failures but because it does not fit well into owning your own retirement.” ~Josh
About your Co-Hosts
A certified public accountant, Josh Bretl has spent the past two decades growing FSR Wealth Strategies into a firm that specializes in tax-focused retirement planning. Because taxes have the single biggest impact on how much you can spend in retirement, Josh is dedicated to developing individualized financial plans that extend and grow his clients’ retirement savings. Based in Elmhurst, Illinois, FSR Wealth strategically preserves and maximizes resources through tax-efficient strategies designed to fulfill retirement dreams.
Apart from producing and co-hosting The Retirement Equals Freedom Podcast, Josh's longtime friend Dave Schmidt is marketing director at FSR. He’s also a content provider and marketing adviser to local businesses and nonprofits. He’s also an advocate for t-shirts, all things 90s (especially the music), short walks and long naps.
FSR Wealth Management is a registered investment advisor located in Elmhurst, Illinois. Information and opinions contained in this audio have been arrived at by FSR Wealth advisors. All information herein is for informational purposes and should not be construed as investment advice. It does not constitute an offer, a solicitation or recommendation to purchase any security. FSR is not providing legal, tax, accounting, or financial planning advice in this audio. These views are as of the date of this publication and are subject to change.
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