The swift and startling events of the past few weeks regarding the collapse of Silicon Valley Bank (SVB) have raised many questions about the extent of the impact that this bank failure will have on financial markets, investors, businesses, consumers, and the broader economy. Great uncertainty remains about what the ultimate resolution and knock-on effects of SVB’s failure will be, however, we want to share two points with you as clients of Deupree James Wealth Management: the first is the difference between today and 2008’s Great Financial Crisis (GFC), and the second is the protection of customer assets at broker-dealers, such as Fidelity Institutional.
This is Different Than 2008
Recent news of SVB’s failure certainly sparks dark memories of the events of the GFC. However, there are key differences to acknowledge. It appears that SVB’s poor balance sheet decisions and concentrated customer base created the conditions for its liquidity and solvency crisis. Unlike in 2008 when the majority of banks, both large and small, had major balance sheet weakness and failed risk management, stringent regulations post the GFC have resulted in far greater resilience and strength in the U.S. banking system itself. While there may be other banks that face similar challenges to SVB, we continue to note the much-improved structure and stability of large, systemically important U.S. banks.
As of this writing on Monday afternoon, the policy response looks to be significant in its protection of depositors. In a joint statement, the Federal Reserve, FDIC, and Treasury announced a plan to fully protect all depositors of SVB and Signature Bank, with 100% of funds available Monday. Further liquidity and funding support was also put in place to support other banks as well.
With this resolution for depositors, the worst-case economic and market scenarios look to have been avoided. Even with this depositor support, we could still see further knock-on effects from SVB’s failure for both private and public markets, which we will monitor closely. We also expect to see continued impacts from the Fed’s rapid tightening cycle, such as continued asset price volatility and economic uncertainty. As events unfold, we will continue to examine the health of the U.S. financial system and markets and its impact on our clients.
The Power of an Independent Custodian
At Deupree James Wealth Management, we partner with Fidelity Institutional® to act as your account custodian. It is times like the present that provide a sharp reminder of the value in partnering with a stable, strong, and independent custodian to hold your securities.
The following answers top-of-mind questions that Deupree James Wealth Management clients may have about their securities custodied with our partner firm:
Q: Who specifically are the custodial partners?
A: Fidelity Institutional®, a division of Fidelity Investments, offers clearing and custody services, investment and technology products and solutions, and brokerage and trading services through financial intermediaries and institutions. Fidelity Institutional clears and settles securities transactions for Deupree James Wealth Management.
Q: Where are my assets custodied?
A: Deupree James Wealth Management does not custody client assets. Rather, custodial services are provided by Fidelity Institutional® through Fidelity Brokerage Services LLC.
Q: Why is a qualified custodian important?
A: As stated in a FINRA Investor Alert updated on November 22, 2010: “Multiple layers of protection safeguard investor assets. For example, registered brokerage firms must keep their customers’ securities and cash segregated from their own so that, even if a firm fails, its customers’ assets will be safe.” Secondly, as a general matter, customers are not considered general creditors of a failed broker-dealer; customers receive distributions ahead of general creditors. General creditors of a failed broker-dealer do not receive any distribution unless all customers have been satisfied in full. A complete synopsis of what happens if a brokerage firm closes its doors can be found here.
Q: What protections does Fidelity have in place for investors?
A: Fidelity companies have over $11.8 trillion in assets for individual and institutional clients. National Financial Services (NFS), a Fidelity company, has SIPC and “excess SIPC” coverage of $1 billion with no per-client limit on securities. In addition, as of June 30, 2022, NFS had net capital of $6.26 billion, which was 13.18% of aggregate debit items and exceeded its minimum requirement by $5.31 billion. A full report on the financial condition of NFS as of June 30, 2022, can be found here.
Q: What if my cash is in the bank deposit program?
A: Deupree James Wealth Management clients who custody assets at NFS have access to a bank deposit program that leverages a network of banks that provides FDIC insurance up to $1.4mm for individuals and $2.8mm for joint accounts.
Q: What if my cash has been invested into a money market fund?
A: Money market funds are considered “securities” and protected by SIPC.
As always, if you have any questions about the impact of SVB, the safety of your assets, or current market conditions, please reach out to us at Deupree James Wealth Management.