Given the turmoil in the banking sector and the collapse of Silicon Valley Bank, do you now advocate for putting one’s cash under their mattress? In today’s environment this seems far more secure than depositing it in a bank. Looking forward to reading your thoughts. – Shoshana Genack, Pittsburgh, PA
The short answer to your question is no, I would not advise keeping your money under your mattress in lieu of a bank. Despite the recent developments, our banking system is sound and your cash is safe. However, before I elaborate, it’s worth sharing some background on the current challenges in our banking system. I have made the effort to do this succinctly and in plain English.
What happened? The saga started on March 10th at 12:00pm when regulators closed Silicon Valley Bank (SVB). While most people outside of Silicon Valley have not heard of this institution, it was the second largest bank failure in history.
What is Silicon Valley Bank? SVB was a highly focused bank within the venture capital world. A large portion of the cash associated with venture capital backed companies was placed with them. Note: Venture capital is money that is invested in a start-up company where there is a substantial element of risk.
Why did this bank fail? Start-up companies were the bank’s major clients, and they tend to borrow a lot of money. When rates were low, business was easier. When rates climbed, it became much more expensive to run their business and things gradually became more challenging for them. As they still needed to make payroll, they began to draw down their cash balances at SVB. This was a problem because SVB mismanaged their deposits and had too much of their cash invested in long-term bonds that had declined in value. When these bonds were sold, the bank experienced losses. Spooked account holders began to quickly pull their money out and nervous investors began to sell the stock, which caused it to drop substantially in price. There was a “run on the bank,” in other words too many depositors withdrew their funds, and the bank could no longer operate so the regulators took it over.
Will there be a wider contagion to financial stocks and the economy? Yes, and this has already started to occur. Since SVB went under, the following big events took place: 1) Signature Bank failed and was taken over by regulators. 2) The Federal Reserve has agreed to protect client deposits at SVB and Signature Bank. 3) First Republic Bank stock has been tanking and the largest U.S. banks agreed to deposit $30 billion into the bank to prop it up. 4) Credit Suisse was taken over by UBS in a forced shidduch made by the Swiss government. Credit Suisse has been experiencing issues for some time. Their challenges were not the result of the current situation, but it was the linchpin that finally brought them down.
Note: This list of ramifications is as of this writing, I imagine by the time this article prints the list will be even longer.
The reality is that, with the increase in interest rates, many companies will face the consequences of years of imprudent risk taking. Legendary investor, Warren Buffett, put it best when he said, “Only when the tide goes out do you learn who has been swimming naked.” Well, the tide is receding, so don’t be surprised as bare bodies start to appear.
I imagine there will be a continued washout of weaker banks and other businesses in this market. The pain is not quite over yet. Beyond the banking system, there will likely be many small companies that will not be able to make payroll and there will be issues in the small cap tech sector as a result.
This situation seems eerily like the Global Financial Crisis (GFC). Is it the same? The current situation is dissimilar to 2008 since large banks are not as leveraged as they were during the GFC. Meaning, they have much more cash available to them and have borrowed far less money. Additionally, while large banks probably have losses on bonds that they hold, it’s only a problem if they lose deposits. In this circumstance, it looks as if they will gain deposits since they are larger, more well known, and more secure than regional banks like SVB, Signature, and First Republic.
Thanks for the whole megillah. So, is my money safe? I don’t know where every Jewish Press reader has their money, but if your cash is at a sizable bank, including those that I have mentioned above, then your funds are probably safe. The reason for this is the Federal Reserve and the regulators seem motivated to do whatever it takes to restore confidence in the banking system. This includes taking over failed banks and basically “insuring” them so that depositors don’t lose their money.
Separately, any funds that are not in cash, but are invested in stocks, bonds, or other instruments, are as good as your investments. This means, if your investments hold up and go up over time, you will be fine regardless of which institution holds these investments.
Let’s say I decide to use my mattress instead. What are the risks? The risks with the mattress strategy are far more concerning than depositing your money at a bank. There is the safety concern. It may get stolen by a stranger who comes into your house to do work or flushed down the toilet by a toddler. Furthermore, if there is a fire, flood, or any other type of issue with your house, the cash can be damaged. Regulated banks currently have $250,000 of FDIC insurance per account if your money were to vanish. This amount may go up dramatically due to recent events.
There is also the fact that your cash will get smaller and smaller as time passes. No, this is not due to moths eating your cash (although that may be a possibility). It’s due to inflation. In a plain vanilla money market account you can now get around 4.5% interest with basically no risk to help offset adverse consequences of inflation.
Finally, it’s important to point out that keeping too much cash on hand, whether under your mattress or in a bank, is rarely the right approach to managing your money. I always advise clients to only keep three to sixth months of living expenses in cash. Any funds beyond that should be invested in the market to outpace inflation and grow so you can achieve your financial goals.
Some perspective and words of chizzuk: The analysts, strategists, and other talking heads will continue to go on national TV or radio trying to stir panic or predict what will happen in the coming days. The key for investors is to ignore the noise and take a step back for some perspective.
For investors, the important thing to keep in mind right now is that while this may feel like a low point, these uncertain times won’t last forever. The market and life are more like a movie reel than a snapshot. The next frame may be better or worse, but over time things will get better. There is no reason to assume that the market or economy will continue in a downward spiral indefinitely just because things are challenging now. They never do.
This is not the first time that markets have been choppy, the economy was weak, and the news headlines were scary. The GFC was exponentially worse. In fact, on March 9, 2009, after the S&P 500 fell 57%, the real estate market was devastated, and the unemployment rate was approximately 10%, investors were understandably terrified. However, just when it seemed that things were going to continue to get worse, they actually got better…much better! The market went on to experience one of the largest and longest Bull Markets in history, creating trillions of dollars in additional wealth for investors.
Every few years there is some crisis in the markets. This time is no different. The characters this time around may be different, but the story is always the same. And the ending is always good. Stay the course, keep investing as the market falls, and if you have any specific questions, feel free to reach out.
Readers are encouraged to ask their personal financial questions, which may be quoted from and addressed in a future column, by emailing Jonathan@shenkmanwealth.com.