As much as $42 billion in cash was withdrawn from Silicon Valley Bank on Thursday, March 9, 2023, an additional $90 billion was withdrawn from First Republic Bank
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a week later, and today, March 20, 2023, we hear of UBS being forced to buy Credit Suisse. Not only are cash deposits being withdrawn, but presumably assets being managed by their wealth management departments also are departing. Many depositors will flee to the safety of banks like Citigroup
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, Bank of America
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, Bank of New York Mellon or any of the other banks that are “too big to fail” for both their cash and their investments. With such turmoil in the markets, asset protection and avoiding risks like SVB
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becomes part of every estate plan. The issue then becomes what to do once clients have their cash and assets out of SVB or other banks suffering from bank runs, what can they do with their cash and other assets to avoid this situation again?
Cash, as they say, is king, especially now that the yield on deposits rival the yield on bonds. In the US deposits are yielding as much as 4.7% while the two year Treasuries are yielding 2.9%. Additionally, cash deposits avoid the market volatility that equities and longer-term bonds are now exposed to.
Cash is not without its issues. If the Fed lowers interest rates to ease some of the problems banks are having, the yield on deposits will also fall. This is in part because you cannot lock in a particular yield as you can with bonds or preferred stock. Cash is not a diversified investment and there is no hedge against inflation. Indeed the purchasing power of cash has declined by more that 30% since the year 2000. Finally, in the medium and long term, a balanced investment portfolio always outperforms cash.
If not cash, then, what should you be buying? If you are not going to need the funds for two years or more, then buying high quality government bonds or investment-grade corporate bonds makes sense. You can also buy government bonds, like I-Bonds, where the yield adjusts with inflation. You can also buy a diversified portfolio of stock and bonds with enough cash to cover any immediate expenses.
What has panicked depositors who had deposits over the $250,000 FDIC insurance amount at Silicon Valley Bank was not the long-term safety of the cash, but the short-term access to the cash when the FDIC took over. Until the Treasury stepped in and guaranteed all deposits regardless of size, people and companies were looking at it taking weeks, if not months, to get some or all of their uninsured deposits out of the bank. When you deposit cash in a bank, you no longer have title to the actual cash, you just have a right to be repaid in cash. The bank then goes and invests that cash in real estate, business and personal loans, and in stock and bonds. None of these investments are risky in the long term, but they are subject to market price volatility, which is why when the investments at Silicon Valley Bank went down in value, it appeared as though there was a higher risk of insufficient capital available to cover deposits. As a depositor, all you hold is a promise from the bank to pay you when you ask; when as it happened, the bank gets closed down by the FDIC, you have to wait until the FDIC liquidates the investments of the bank to cover the uninsured portion of the deposit.
This promise to pay is also a characteristic of investments held in street name by a brokerage firm. When you have an account at a brokerage firm and have investments in that account, the name on the investment is not your name, but in the name of the brokerage firm. This is to facilitate the ease of transfer, purchase and sale of investments electronically. This means that, as with an uninsured deposit at a bank, stocks and binds in street name could take some time to be withdrawn from the brokerage firm, if that firm ever got into trouble. Holding stocks in certificate form is still possible, though time consuming and expensive to buy or sell; but more commonly those clients who are concerned about getting access to their investments, and want to keep the investments titled in their name, the alternative is to place the investments with a Corporate Directed Trustee. The Directed Trustee cannot make investments or distributions except when directed by you or your asset manager. In this case, the title to the investments remains in your name (or the name of your trust), so if there were ever an issue, you have access to all of your investments since they are not an asset of the Directed Trustee.
So, for those clients who have withdrawn their cash and other investments from SVB or another bank and put it at a bank “that is too big to fail,” that is a good first move, but you can have your assets better safeguarded by a diversified portfolio and using a Directed Trustee.
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