WHAT IS HAPPENING WITH BANKS?

In the last week and a half, all we have seen in the headlines is news about bank failures. Silicon Valley Bank (SVB), Signature Bank, First Republic, Credit Suisse- all reputable banks that are having trouble. SVBs failure was the largest failure since Washington Mutual in 2008. This has led to volatile markets as investors weigh the outcome and uncertainity of what this may mean for the economy. Many comparisons and speculations have also been made to 2008 and if this means that a financial crisis is on the horizon.

This time, it is not junky mortgages causing problems (like 2008) - it is interest rate risk. Rising interest rates caused the value of the bonds on SVBs balance sheet to lose value.SVB had heavy exposure to interest rate sensitive Treasury & other government securities. The bank was then not as capitalized as well as it needed to be and word got out. This started trending on Twitter which caused customers to withdraw their money from the bank - causing a run.The FDIC had to step in and take over. By the time the weekend was up, the government had announced they would protect depositors above their $250k to the full amount of their deposits.

The highest priority for the government is to do what they can to keep consumers confidence in banking high. They do not want people to run to their banks and take out their money. Their swift action to protect depositors provided relief as it is seen as a move to greatly reduce odds of a systemic crisis. Remember - in 2008 mortgages were being defaulted on, there is no defaulting happening with the bonds. They have just lost value but they still hold value at maturity. The problem lies in banks having to sell them before maturity to raise capital - which they would need to do if there was a run on the bank.

The market volatility has increased as it tries to discern the ramifications of this banking situation.We have seen different bank scenarios with different solutions (other banks pumping money into First Republic, UBS buying Credit Suisse) but time will tell how it holds. Again, all of this is to keep consumer confidence in banks high so people don't try to pull all their deposits. If that is kept to a minimum, this can be shorter lived. In the meantime, markets will continue to be volatile. As an investor - you should remain balanced & diversified & wait this one out.

This has caused a few things to happen which can be considered silver linings. Bond yields have dropped causing fixed income investments to go up. This is why portfolios need to be diversified! Many speculate that this will cause the Fed to slow down on raising interest rates. A .25% hike is still expected this week and many hoping the Fed may pause after that.