March 14, 2023

The financial stress that has affected a handful of banks during the last few days has resulted in both a swift regulatory response and increased market volatility. In this report, The Mather Group LLC (TMG) explores the origin of and response to this stress, as well as potential economic and market outcomes.

It is important to note at the outset that TMG does not hold deposits at the affected banks. Additionally, given TMG’s investment philosophy, which emphasizes investment diversification across companies and sectors, we do not anticipate the bank failures to date will meaningfully impact our client portfolios.

What has occurred?

On March 9, clients of Silicon Valley Bank (SVB) attempted to withdraw approximately $45 billion of uninsured deposits, roughly 30% of the bank’s total deposits. Uninsured deposits are those exceeding $250,000 per account, which are not guaranteed by the Federal Deposit Insurance Corporation (FDIC). The majority of these deposits had been invested by SVB in long-term Treasury bonds and commercial loans that, with the rapid rise in interest rates driven by recent Federal Reserve Board (Fed) policy, were then worth far less in market value than their original face value.

Thus, SVB would have taken huge losses by selling these assets immediately to repay its worried depositors, as it had already done on March 8 when it suffered $1.8 billion of losses from earlier asset sales. Essentially, SVB was illiquid, and so it was seized and put into receivership with the FDIC.

Signature Bank in New York and Silvergate Bank in California have also been seized or closed in the last few days, further heightening depositor and market stress. Like SVB, each relied upon extremely concentrated sources for its deposits, similarly investing these funds into assets that had fallen in value due to recent Fed interest rate hikes. This was the source of their illiquidity and their inability to repay depositors.

What has been the regulatory response?

To avoid a potential “run” on other banks by their depositors, the FDIC, Fed, and Treasury have constructed a series of funding programs to “guarantee” deposits that exceed the $250,000 insurance threshold. These programs are intended to eliminate any concern depositors might have about the immediate availability of their funds.

The Fed, through its discount window, has always allowed banks to post assets such as Treasury bonds in exchange for receiving funds to increase banks’ liquidity. However, the Fed has always discounted such assets—a so-called “haircut”—to assure that banks manage their liquidity in a prudent manner. That haircut has now been eliminated, and banks will receive 100 cents per dollar of assets held by the Fed, despite what their true market value may be. Thus, there will no longer be the need for “fire sales” of bank assets, as occurred with SVB.

In addition, loans of up to one year will be offered to banks by the Fed, backstopped by the Treasury for up to $25 billion in total funding. Again, bank assets pledged as collateral for these loans will be valued at 100 cents per dollar of face value, eliminating a need for forced sales.

Is this another bank bailout?

Yes and no might be the prudent answer. When the global financial crisis (GFC) occurred, many financial institutions were bailed out by the Fed and Treasury to forestall a looming financial crisis. In addition, except for fraud, no executives of those firms received any civil or criminal penalties. This was all summed up by the phrase “moral hazard,” meaning that financial institutions took imprudent risks to heighten their returns, always assuming that any losses would be offset by immediate regulatory support.

Regulators today state that no bailout has occurred or will occur. However, if the FDIC’s sale of these banks’ assets is insufficient to offset the cost of repaying their bank deposits, then other banks will be assessed fees to offset any shortfall. Such an unexpected expense will, most likely, be passed on to these banks’ borrowers, depositors, and shareholders. So, while far smaller in funding size than that which occurred during the GFC, these programs may eventually be seen as a bailout.

Regulators also state that the shareholders and bondholders of these seized banks will be wiped out, and that executives of these banks will be fired. This response is intended to diminish any moral hazard that may exist today among other banks. However, it is too early to foresee whether, unlike the GFC, any executives will face further regulatory action.

How will this affect the economy and markets?

Without these regulatory programs, there was increasing fear that the technology sector, especially early-stage firms, would lack sufficient funding to continue in business. Some of their venture capital sponsors were also large depositors at SVB, but their funds are now also fully liquid.

However, it appears that some firms and individuals are now reallocating their deposits away from smaller or regional banks to far larger banks (e.g., JP Morgan), which are assumed to be “too big to fail.” Any reduction in deposits at these smaller banks would assuredly reduce their capability to offer loans, mortgages, and lines of credit to their clients in the future. In addition, if clients move their deposits, they may move other banking services as well. Such a transition could dampen the economic vitality of more than a few affected markets.

Another significant unknown is how the Fed will respond to this level of financial stress with respect to its ongoing series of rate hikes. Before last week’s bank failures, there was market consensus that the Fed would raise rates by an additional 0.25%-0.50% at its upcoming March meeting. Now, firms such as Goldman Sachs are suggesting that, with these unexpected bank failures and increased market uncertainty, the Fed may need to pause any further hikes until its May meeting. The rationale is that there needs to be strong evidence of market stability—and enduring consumer confidence—before imposing any further interest rate stress. Any pause, of course, could question the Fed’s resolve in tamping down inflation.

The equity and credit market response to this financial stress was immediate—but uncertain. Treasury bond yields have declined significantly in recent days, with the 10-year Treasury falling from 4.07% on March 2 to 3.51% midday on March 13. Of course, as bond yields fall, their price rises. The primary driver of this fall in yields has been a “flight to safety” by worried investors. Unfortunately, these price increases occurred too late for SVB. How long these lower yields will continue is uncertain.

Equity markets have increased in their volatility as well, with financial services indices such as the S&P Regional Bank Index falling 22% since March 8, while the S&P 500 has fallen only 3% during the same period. This suggests that the equity markets are now targeting a specific sector only, rather than the broader market. Of course, past performance is no guarantee of future results.

Schwab Outlook

The market has recently created selling pressure for Schwab, and TMG would like to share several perspectives on this custodian and its bank. First, Schwab has FDIC insurance for its account holders at Schwab Bank for up to $250,000 per account, or $500,000 for a joint account. For the brokerage business, the Securities Investor Protection Corporation (SIPC) offers up to $500,000 of insurance for brokerage clients, which includes up to $250,000 for client cash and $250,000 for client securities. Of course, clients always retain full ownership of their brokerage assets, which can be recovered even if a brokerage fails. Hence, client recoveries do not just end at $500,000.

The following description of Schwab’s financial strength is from Peter Crawford, Schwab’s Chief Financial Officer:

Schwab has "access to significant liquidity," including an estimated $100 billion from cash on hand, portfolio-related cash flows, and net new assets expected to be realized over the coming year, Crawford said. More than 80% of the company's total bank deposits fall within Federal Deposit Insurance Corp. insurance limits, he said.

For the first quarter, Charles Schwab is forecasting revenue growth of 10% compared with last year, when revenue fell 1% to $4.67 billion. The consensus is for first-quarter revenue of $5.36 billion, according to a Capital IQ poll of 10 analysts. The company guided for adjusted pre-tax operating margin in the 45% to 47% range, he said.

Analysts at Morgan Stanley also offered these perspectives today on Schwab:

Morgan Stanley…said the US Federal Reserve's announcement on Sunday evening that it is prepared to make available additional funding to banks is also a supportive factor.

The analysts said that the Fed's move means that Charles Schwab will have an additional source of liquidity in addition to Federal Home Loan Bank borrowing and obviates its need to sell its securities portfolio potentially at a loss to satisfy withdrawal demands from clients.

Morgan Stanley also said Charles Schwab's Tier 1 leverage ratio of 7.2% is above the bank's goal of 6.25% to 6.75% and much higher than the 4% regulatory minimum. Leverage ratio is a measurement of a firm’s financial position regarding its debt and capital or assets. A higher ratio means greater financial strength, and Schwab’s leverage ratio is almost twice that of its required minimum from the Fed.

The investment bank (Morgan Stanley) said some aspects of Charles Schwab's deposit base also seem to suggest "a healthy deposit/customer base, and a stickier and more transactional customer deposit base."

Overall, TMG will carefully monitor the financial performance of Schwab and is prepared to make appropriate changes if it deems them to be necessary. At the moment, however, we continue to maintain our relationship with Schwab.

In addition, TMG continues to employ its risk management tools in response to this period of financial stress, and clients who continue to adhere to their financial plan will maintain the strongest pathway through this uncertain period. Your trusted advisor at TMG is ready to respond to any questions or concerns which you might have, and to help assure that your financial plan remains both timely and actionable. Please reach out to your advisor for guidance at any time.


Sources: Bloomberg; Charles Schwab & Company; Federal Deposit Insurance Corporation; Federal Reserve Board; Goldman Sachs; JP Morgan; Morgan Stanley; Reuters; US Treasury; Wall Street Journal

The Mather Group, LLC (TMG) is registered under the Investment Advisers Act of 1940 as a Registered Investment Adviser with the Securities and Exchange Commission (SEC). Registration as an investment adviser does not imply a certain level of skill or training. For a detailed discussion of TMG and its investment advisory services and fees, see the firm’s Form ADV on file with the SEC at, or on the firm’s website at The opinions expressed, and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. The opinions and advice expressed in this communication are based on TMG’s research and professional experience and are expressed as of the publishing date of this communication. All return figures and charts shown are for illustrative purposes only. TMG makes no warranty or representation, express or implied, nor does TMG accept any liability, with respect to the information and data set forth herein. TMG specifically disclaims any duty to update any of the information and data contained in this communication. The information and data in this communication does not constitute legal, tax, accounting, investment, or other professional advice. Investing involves some level of risk. Past performance does not guarantee future results.

The Mather Group



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