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Bank Failures: What to know. What to do.

March 14, 2023

Recent events, bank runs to be specific, are causing increased anxiety for both savers and investors. While I do not know of any clients of Henry Wealth Management who had accounts at Silicon Valley Bank (SVB) or Signature Bank New York, the fear of "what if this happens at my bank," can elevate apprehensiveness. 

Here's a fact - even the healthiest banks do not keep enough cash on hand to repay customers, should they ALL demand ALL of their deposits IMMEDIATELY. Bank runs are insidious because they can become self-fulfilling. Fueled by fear, people line up to request withdrawals and as word gets out, fear can quickly turn to full-blown panic, creating a that a given bank cannot meet its customers instant demands.

When a bank does fail, depositors are made whole by the FDIC (Federal Deposit Insurance Corporation) fund. Traditionally, this insurance covers accounts up to $250,000, per depositor ($500,000 for joint account holders), per bank. Yet a "systemic risk exception" allows FDIC to use the Deposit Insurance Fund to ensure that even depositors above those limits won't lose. In fact, uninsured depositors have been paid out in full in every bank failure going back decades, with the lone exception of IndyMac in 2008: Federal regulators seize crippled IndyMac Bank, Los Angeles Times, July 12, 2008

On Sunday, March 12, 2023, Federal regulators announced that all customers of both SVB and Signature would indeed have access to their money. The next day in Britain, it was also announced that the largest bank in Europe, HSBC, was taking over the British arm of SVB: HSBC Buys U.K. Arm of Silicon Valley Bank. Global Regulators Are Pitching In, Barron’s, March 13, 2023.These prompt actions should allay fears. 

So while depositors will be made whole, stock and bondholders of banks, or of any failing business for that matter, remain exposed. These are the risks of investing and why we believe in, preach and practice broad-based diversification within our clients' portfolios.  

These types of events can also cause markets to become more volatile that usual. Yet as we also preach, long-term investors should not panic or lose sight of their goals.  An extreme example of volatility was the already referenced global financial crisis of 2008, when the S&P 500 lost nearly half its value! Yet it fully recovered within two years and then went on a historic decade-long run. During the downturn, investors who sold were harmed, while those who held on were ultimately rewarded.

Our mantra in good times and bad remains, "build a portfolio that you can live with, then live with it." As always, we are here to offer guidance, answer questions, and calm fears, and we certainly hope this Blog helps in that regard.