Bad Banking News Continues
In the days following the Silicon Valley Bank failure we saw a bailout from the US government, followed by the collapse of a second bank, First Republic Bank, which was bailed out by the banking industry itself to the tune of $100 billion. There are currently over a dozen banks considered to be at risk for possible collapse in the near future. The crisis is not over yet, and many experts in both the government and private industry believe a recession may loom in late 2023. This month we explore which U.S. banks carry the largest shares of uninsured deposits and what that means for the average investor.
Regional Banking Crisis
The recent regional banking issues in the U.S. began with the collapse of Silicon Valley Bank (SVB), which was closed by federal regulators on March 10, 2023. See our newsletter “Bank Failure” from March 13, 2023, for details. Signature Bank (SB) was closed two days later. Less than a week later, America’s largest banks agreed to deposit $30 billion into troubled First Republic Bank in what was meant to be a sign of confidence in the banking system. JP Morgan Chase added another $70 billion in financing facilitation further bailing out First Republic.
U.S. government agencies then passed measures meant to restore trust in the banking system. The U.S. Treasury made sure all SVB and SB customer deposits were protected, even amounts exceeding the Federal Deposit Insurance Company’s (FDIC) threshold of $250,000.
In addition, the Federal Reserve (Fed) created the Bank Term Funding Program (BTFP), offering one-year loans to banks pledging U.S. treasuries and other high-quality securities as collateral. The BTFP is a new source of liquidity for struggling banks and reduces the need to quickly sell off securities in a time of stress. Since the BTFP’s inception, banks have already borrowed more than $50 billion to cover their liquidity needs.
Uninsured Deposits
Dating back to the Banking Act of 1933, The Federal Deposit Insurance Corporation has guaranteed the standard deposit insurance amount of $250,000 per depositor, per insured bank, for each account ownership category (e.g., single accounts, joint accounts, and business accounts.) The FDIC insures deposits that a person holds in one insured bank separately from any deposits that the person owns in another separately chartered insured bank.
However, the FDIC does not cover any amounts exceeding $250,000 and does not insure investments held at the failing bank such as stocks, bonds or treasury bills, crypto assets, or safety deposit boxes. The greater the amount of uninsured deposits the more there is to lose in the event of a bank failure.
Below we take a closer look at a ranking of the top U.S. banks by uninsured deposits.
Keep in mind that the amount of uninsured deposits does not indicate the risk of a bank failure. It only indicates the share of deposits that would be wiped out in case a bank fails and the government does not step in. These large shares of uninsured deposits across the U.S. banking industry have sparked a debate about how regulators should respond if banks get in trouble.
Are your deposits safe?
Bank bailouts create moral hazards, even if the bailouts are justified. Bailout critics like to point out that protecting large depositors who are supposed to be at risk are bailing them out of the consequences of their actions, and in the process weakening market discipline and encouraging riskier investment behaviors. Therefore, the government and the Fed must review each bank failure individually and decide carefully which signals to send to the market.
Crisis Not Over Yet
Despite multiple measures to instill confidence in the banking system, JPMorgan Chase CEO, Jamie Dimon, commented on the regional banking crisis in his annual letter to shareholders:
“As I write this letter, the current crisis is not yet over, and even when it is behind us, there will be repercussions from it for years to come. But importantly, recent events are nothing like what occurred during the 2008 global financial crisis.”
Bear in mind that Jamie Dimon has been with JPMorgan since 2005 and is the only remaining CEO of a major U.S. financial institution that also led his firm through the financial crisis of 2008.
Dimon also blames regulators, rating agencies, and banks alike for having made mistakes that caused the current regional banking crisis and sees potential solutions in forward-looking legislation that encourages collaboration among these actors to avoid similar situations in the future.
Fed: Banking Crisis Will Tilt U.S. Into Recession
The fallout from the recent banking crisis is likely to push the U.S. economy into a mild recession in late 2023 according to the minutes from the Fed’s March 2023 policy meeting. This is the first time in the current rate hiking cycle that staff economists at the Fed have forecast such a recession.
The meeting minutes also pointed out that the recent banking crisis is “likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation.”
One consequence of this updated forecast is a smaller than expected rate hike of only 25 basis points, the ninth rate increase from the Fed in a row. See chart below, “Fed Interest Rate Increases,” for details. Some members of the Fed considered a 50 basis-point rate hike, given the persistently high inflation, according to the minutes. The Fed’s latest rate hike brought the federal funds rate to a range of 4.75% to 5.00%, the highest level since September 2007.
In early May 2023, the Fed will meet again to decide on the next steps concerning of the federal funds rate with many experts seeing another increase of 25 basis points likely. The rate increase will further help to ease inflation but may also put U.S. banks with large holdings of held-to-maturity securities into a more difficult situation.
What Does it Mean for Investors?
It is unclear if more banks will fail before the banking industry stabilizes. With another Fed rate increase likely and a looming debt-ceiling fight in Congress high risk investments are looking particularly volatile. Investors with cash holdings above the FDIC insurance threshold should be looking for more stable options rather than leaving those funds in the bank. First trust deed investment properties are safe opportunities with predictable returns and low risk.
At Safeguard, we offer first trust deed note options secured by actual, physical assets. Current LTV ratios are very conservative averaging at 65%. This provides a healthy equity cushion to your investment. In addition, our rates start at 10% outpacing inflation and most conservative investment options. Our team has spent the last two decades creating and managing wealth for our clients. Don’t let inflation diminish what you worked so hard for. Call or email SCP today and put your money to work for you! 877-280-5771.
