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Every Christmas my wife and I watch “It’s a Wonderful Life”. It is the story of George Bailey, who runs the local Building and Loan in Bedford Falls, New York. The day George and his new wife are to depart on their honeymoon, a bank run begins on Building and Loans and other local banks. The scene shows the townspeople huddled in the Building and Loan office asking to withdraw their deposits. George is explaining to them that their money is not in the bank vault; it is in another person’s house in the form of a loan, and that person’s money is in another person’s house, etc. In the end, George must use his honeymoon savings to pay out the deposits. At 5PM they celebrate the closing of the day, after all the withdrawals George has $2 left.

Overall, this is a perfect explanation of a bank run. People line up to get their deposits out of a bank, and the bank, hopefully, has the money readily available to pay out what is required. Bank runs have occurred several times, most of them taking place during the Great Depression and 2008’s Great Recession. I heard a story of a bank in Japan adjacent to a popular bakery. One day, the bakery had a line out the door that extended beyond the bank. As people drove past, they noticed the line and started to panic … is there a run on my bank? The fear of a bank run caused the run on this Japanese bank.

Cut to a few weeks ago and let’s revisit the Silicon Valley Bank (SVB) scenario. No lines were out the door; this bank run started in a group chat between large SVB depositors and then escalated on Twitter. One person said they were withdrawing their money from the bank which caused additional customers to panic. In a couple of days, SVB went from the 16th largest bank in the US to being closed by the California Department of Financial Protection and Innovation, which appointed the FDIC as receiver. Additionally, Signature Bank of New York closed the same week.

The weeks that followed were filled with conversation and speculation. Who/what initiated the bank run? Was it the Federal Reserve (Fed) hiking rates too quickly? Was it the bank’s fault for mismanaging its loans and not having enough free cash flow to handle a quick flight of cash? Are venture capital firms who quickly pulled their money from the bank to blame? It was a bit of everything; all parties are to blame for what occurred. What matters for our clients is what happens now.

First, the market has taken this event in stride; the S&P 500 Index has been up nearly 7% since the day of the bank failure. This could be the market pricing in a Fed pivot on interest rates. Market consensus is that the Fed is done with its current hiking cycle (a target to hike short-term rates to 6%) and will pause or begin to lower rates in the second half of the year. However, it is best not to speculate what the Fed may do from here since they do not know. A lot of data will emerge before their meeting in May. Therefore, what is the best thing for you to do? Stick with your plan and investment objectives. My guess is they have not changed because of the bank collapse.

Second, we need to address what to do with your cash. If you have over $250,000 in a bank (congratulations) or over $500,000 in a joint account, then seriously consider diversifying your banks or call your advisor to discuss investment options for excess cash. Money market mutual funds, CDs, and Treasury Bills are available and, currently, have competitive rates. Also, when you invest your dollars with KWB Wealth through LPL Financial your holdings are in securities. LPL Financial is not a bank; it is a custodian, meaning it has custody of your assets for you. If LPL Financial were to “go under,” the securities you own would be transferred easily to another custodian. Rest assured, LPL Financial is in great financial condition and we have no concerns about their credibility. 

Third, and a more worrisome element, is how will this affect smaller, regional banks? Small businesses rely on small banks for loans to start or grow their business. Larger banks are commonly uninterested in small business loans as they do not “move the needle” for such a large operation. Will a flight of assets from smaller banks to larger, “safer” banks cause a slowdown in lending? At this point, it is difficult to say, but it is something for us to keep an eye on. One thing I do know is that changing banks is not fun for anyone. It is possible that the required inertia to switch banks will benefit the smaller banks; they might not have to deal with the flight of deposits that SVB dealt with. Still, a slowdown in small business loans would be a hit to the economy.

The first quarter was a good one for the markets. The S&P 500 was up about 7%, a very welcome change from the challenging environment of 2022. We believe that markets will continue to perform well as recession fears ease over 2023 and 2024. There will, of course, be volatility, but as long-term investors we see continued gains in the years to come.

As always if you have any questions, please contact us, and stay safe. 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.  All indices are unmanaged and cannot be invested into directly.

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

Investing involves risk including loss of principal.

No strategy assures success or protects against loss.  The economic forecasts set forth in this newsletter may not develop as predicted and there can be no guarantee that strategies promoted will be successful.