2023 Bank Liquidity Fears


Contributed by: Jordan Buffum, CFP®

Last week we saw Silvergate Bank, Silicon Valley Bank and Signature Bank across headlining news.  Each one of them failed, for similar yet different reasons.  In general, banking is an enterprise that relies as much on confidence as on cash.  If either of those run out, the game is over, for any bank.

Silvergate Bank

Silvergate has served as one of the two main banks for crypto companies, along with New York-based Signature Bank. Silvergate had just $11 billion in assets and bankrupt crypto exchange FTX was a major customer. At the end of 2022, customer deposits plummeted 68%. In January of 2023, it laid off 40% of its workforce, reported a $1 billion net loss from Q4 of 2022 and saw $100 million seized due to the FX probe.  They went to the Federal Home Loan Bank for a $4.3 billion loan.  On Wednesday, March 8, Silvergate was out of options and announced it was winding down its operations and liquidating the bank.  The stock plunged 36% in after-hours trading and the Fed ended up seizing control on Sunday, March 12.

Silicon Valley Bank (SVB)

On Friday, March 10, Silicon Valley Bank, a major lender to startups, collapsed after customers withdrew more than $42 billion.  Because of this, SVB was forced to sell $21 billion of bonds at a $1.8 billion loss.  Many of those bonds were yielding 1.79%, making the bank look like an underperformer and Moody’s was considering downgrading its rating.   SVB chose to raise new equity from the venture capital firm General Atlantic and to sell a convertible bond to the public.  This move spooked their client base of venture capitalists and more than 85% of client deposits were uninsured.  All of this led to an exodus of client account balances.

Note that the FDIC insures deposits up to $250,000 and anything above this level was not part of the guarantee scheme, leaving those excess deposits uninsured. For the likes of SVB, those uninsured deposits were something close to 97% of the bank’s total deposits.

Signature Bank

Signature bank was the third-largest bank failure in U.S. history.  Roughly 90% of client deposits are uninsured.  On Friday, March 10, customers were alarmed by the sudden collapse of SVB and withdrew more than $10 billion in deposits.  They had no indication of problems until they had the run on deposits, which they claim as purely a contagion from SVB.

Government’s Response

The government (the Fed, FDIC and Treasury) announced three strategies in an attempt to curb the crisis emanating from the collapse of SVB:

  • All depositors at SVB and Signature Bank were made whole and access to their funds was available this week.
  • The Fed has created a new facility called the Bank Term Funding Program (BTFP) that will offer loans up to one year to banks, if needed. BTFP will be backed by money from the Treasury’s Exchange Stabilization Fund – $25 billion, an amount large enough to cover ALL UNINSURED DEPOSITS at US banks.
  • The FDIC invoking the systemic risk exception which allows the entity to expand its cause if an institution is deemed a risk to the entire system. The deposit insurance fund can now cover the gap between proceeds raised from the sale of SVB’s assets and the remaining deposits.

The FDIC has the authority to guarantee all deposits of an institution if that bank is a systemic risk to the broader ecosystem.  To move the $250k deposit ceiling for the whole industry however, it does require Congressional approval. The deposit insurance fund is restocked by proceeds charged for its insurance. Hence, no cost to the taxpayer, so don’t call it a bailout.

The Federal Reserve

A logical question as a result of recent events is “does this change the narrative for the Fed?” Given three bank failures in the last week and a jobs report that was not all that hot when looking at the makeup of the number, the Fed certainly has grounds to hike 25 bps next week vs. hiking the previously suspected 50 bps. Given the size and speed of the recent hikes (450 bps in just 12 months) as well as these recent developments, it might make sense to slow things. Markets have aggressively repriced the interest rate outlook the past few days, with the terminal rate going from a peak of 5.70% back down to 4.75% as of Monday morning.

Schwab’s Positioning

It is only natural to turn these instances into “what-ifs” for your personal accounts. Investments at Schwab are held in investors’ names at the Broker-Dealer (Charles Schwab). These are separate and not comingled with assets at Schwab’s Bank which is great news for our clients.  Actual cash held in client accounts is FDIC insured per the limits.

Schwab does not have any direct business relationship with Silicon Valley Bank or Signature Bank, so there is no exposure to any direct credit risk from either. Collectively, more than 80% of client cash held at Schwab Bank is insured dollar-for-dollar by the FDIC. According to S&P Global Market Intelligence, that percentage is among the highest of the top 100 U.S. banks. As a comparison, the banks in the news the last few days have between 2% and 20% of their deposits insured.

Schwab has a broad base of high-quality customers across multiple lines of business, capital well in excess of regulatory requirements, a high-quality and relatively small loan book, and a conservative investment portfolio that is 80% comprised of securities backed by the U.S. Treasury and various government agencies.  As a further safeguard, Schwab has access to over $80 billion in borrowing capacity with the Federal Home Loan Bank (FHLB), which is an amount greater than all our uninsured deposits. This helps provide the firm significant access to liquidity, so money is there when clients need it.

Overall Take

Setting such a precedent by the government helps to restore confidence in the banking system.  Failing to guarantee depositors >$250,000 could potentially have led to a massive shift of depositors away from small and regional banks and into large money centers. By sending a message that ALL depositors will be made whole, it sets the precedent that similar treatment would be given to other banks, helping to short-circuit the doom loop. On the negative side, the fact that three banks have nearly gone bust should raise a few eyebrows.

The best way to prevent a bank run is to restore confidence in the system. And the best way to restore confidence in the system is to demonstrate that adequate funds are available.  The Fed’s recent movements are certainly a huge step in developing that reassurance as we move forward.


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