The financial crisis of 2008 was one of the most devastating economic events in modern history, and now in March 2023, three more banks have fallen victim to the same fate. On March 8, Silvergate Bank announced it would wind down its operations due to losses suffered in its loan portfolio. Two days later, Silicon Valley Bank was taken over by regulators, and on March 12, Signature Bank was closed by regulators. These collapses over the weekend were the second- and third-largest bank failures in U.S. history, smaller only than the 2008 collapse of Washington Mutual.

Key Takeaways

· All deposits have been guaranteed due to U.S. Government intervention.

· Issues result from cash-depleted high-tech and cryptocurrency bank exposure.

· Provident client assets are secure and diversified.

What Happened?

Silicon Valley Bank had been a major lender to technology start-up companies, while Signature Bank frequently did business with cryptocurrency firms. The failure of these two banks has caused widespread economic disruption, as thousands of people are left without access to their funds or credit lines for businesses that depend on them.

In response to these banking failures, the Federal Reserve, FDIC, and U.S. Treasury announced that measures would be taken to ensure all deposits at the failed banks will be honored. According to FDIC Chairman Jelena McWilliams: “The FDIC is committed to ensuring that depositors of these institutions continue to have access to their insured deposits without interruption." President Biden announced today, "No losses will be borne by the taxpayers" in the process of ensuring financial stability and encouraged all Americans to "feel confident" about the U.S. banking system.

What Should We Expect in the Future?

While these issues are systemic in nature, they are also isolated to the same high-tech and cryptocurrency industries which have faced extreme economic disruption since early 2022 due to the slowing U.S. economy. A widespread banking failure is unlikely, but failure has occurred in these institutions due to their overexposure to banking relationships with distressed companies.

The broader view which Provident Financial Planning is monitoring for clients is that these failures further show the weakness in the U.S. economy. Our opinion is that ongoing economic deterioration will continue in the form of rising unemployment and tightening financial conditions, which slows economic pace. These two results are the byproduct of Federal Reserve interest rate hikes, which leads to lower inflation, the desired outcome of the Federal Open Market Committee.

Is My Money Safe?

Provident uses Schwab Institutional and TD Ameritrade, both subsidiaries of Charles Schwab Corporation, as custodians for client assets. Different from banks, custodians don’t comingle “deposits” or client assets in their corporate finances. For more information about how client assets are protected at Schwab, click the link below.

http://content.schwab.com/learningcenter/assets/pdf/Asset_Safety.pdf

The closures of Silicon Valley Bank and Signature Bank are a stark reminder that even during times of relative economic stability, large financial institutions can fall prey to market forces. This latest round of banking failures highlights yet again how important it is for individuals and businesses alike to diversify their investments to protect themselves from potentially devastating losses.

Make an appointment for a free consultation to speak with the Provident Financial Planning team of Certified Financial Planner™ and JD/CPA tax experts, so we can advise you on how to implement an investment, tax, and legacy strategy that is tailored to you.

Schedule an appointment.

In His Name,

Zachary J. Montgomery, JD, CPA, CFE

zachary@providentfp.com

‍