Earlier this month, the FDIC took over Silicon Valley Bank (SVB) and Signature Bank. To boost the stability of the banking system, the government effectively protected all depositors in the banking system. While some risk remains, we believe the big systematic risks are now lower. We encourage investors to remain disciplined in following their long-term investment plans.
In its simplest form, banks gather deposits from clients (individuals and corporations), and they pay those clients a short-term interest rate. They then invest some of those deposits in fixed income securities, like US Treasuries or mortgage-backed securities. Depending on the duration of their fixed income portfolios, like many investors' fixed income portfolios, some banks experienced substantial market declines during 2022. With a smaller fixed income portfolio, they have less money to repay their depositors, should they want to withdraw their money. If one despositor wants to withdraw their money, it's not really a problem. But, if enough depositors want to withdraw their money, you have a bank run. In the case of SVB, run risk was higher given the despositor concentration with Venture Capital--backed companies. The intersection of these risks can result in liquidity risk, which is at the core of the issue today.
The government acted quickly to bolster confidence in the banking system. Key actions included:
These actions focus on protecting depositors and the confidence of the banking system; these programs do not protect shareholders or debt holders.
This is not the global financial crisis. Banks are better capitalized, the government has learned a lot of hard lessons on how to handle bank failures, and the root causes of today's issues are very different. All that being said, we expect some additional fallout from this episode, and we expect some continued market volatility as the ramifications of these recent events are fully understood.
On the bright side, the Fed can now understand that its rate-hiking cycle has destabilized the financial system. Promoting financial stability is one of the Fed's core functions, in addition to its dual mandate of price stability and full employment. As such, we expect the Fed to be more cautious in future rate hikes, potentially leading to a more stable rate environment.
In every economic cycle and every market cycle, there are risks, and there are opportunities. We've recently been reminded that some risks can spiral out of control if they are not contained. Thankfully, quick action from the Fed, Treasury, and FDIC substantially reduced the risk of a financial crisis. But risks remain, and today's risks are tomorrow's opportunities. Perhaps that's the nature of market cycles. Just as we encourage investors to stay invested through recessions and bear markets, we encourage investors to remain disciplined in their long-term investment plans.
We're here to help. Contact us today.
Michael Embrescia is a financial advisor located at EmVision Capital Advisors, 251 W. Garfield Rd. Suite 155 Aurora, OH 44202. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at (330) 954-3770 or at info@emvisioncapital.com.
Important Information
This is for informational purposes only, is not a solicitation, and should not be considered investment, legal, or tax advice. The information in this report has been drawn from sources believed to be reliable, but its accuracy is not guaranteed, and is subject to change. Investors seeking more information should contact their financial advisor. Financial advisors may seek more information by contacting AssetMark at 800-664-5345.
Investing involves risk, including possible loss of principal. Past performance does not guarantee future results. Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns. There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio. No investment strategy, such as asset allocation, can guarantee a profit or protect against loss. Actual client results will vary based on investment selection, timing, marketing conditions, and tax situation. It is not possible to invest directly in an index. Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested directly. Index performance assumes the reinvestment of dividends.
Investment in equities, bonds, options, and other securities, whether held individually of through mutual funds and exchange traded funds, can decline significantly in response to adverse market conditions, company-specific events, changes in exchange rates, and domestic, international, economic, and political developments. Bloomberg® and the referenced Bloomberg Idex are service marks of Bloomberg Finance L.P. and its affiliates, (collectively "Bloomberg") and are used under license. Bloomberg does not approve or endorse this material, nor guarantees the accuracy or completeness of any information herein. Bloomberg and AssetMark, Inc. are separate and unaffiliated companies.
AssetMark, Inc. is an investment adviser registered with the U.S. Securities and Exchange Commission. ©2023 AssetMark, Inc. All rights reserved.
105476 | C23-19748 | 03/2023 | EXP 03/31/2025