According to wealth consultants, a growing number of wealthy individuals and family offices are shifting their funds from cash deposits to treasuries, money markets, and other short-term products.

 

Investors with a high net worth usually hold millions of dollars or even tens of millions of dollars in liquid assets in their bank accounts for the purpose of paying bills and other unanticipated costs. Their account balances often exceed the $250,000 maximum that be be guaranteed by the FDIC.

 

As a result of the failure of Silicon Valley Bank and the possibility of gaps appearing in the network of regional banks, many customers, according to wealth advisors, are now asking basic concerns about how and where they should put their assets.

 

Michael Zeuner, the managing partner of WE Family Offices, which provides advisory services to rich investors and family offices, said that during the first weekend of March, there was a lot of fear. The queries that he immediately received from customers on Saturday and Sunday were, 'how is my cash deployed?' Is there any indication of it on the bank's balance sheet?

 

And these are very affluent families and investors who have achieved a great deal of success, but they have never given that subject any attention previously.

A jolt to the system

The problem at SVB has only served to accelerate a wider effort that rich investors have been making over the course of the previous year to shift cash out of bank accounts and into Treasuries and money markets.

 

Treasuries and money markets may now give a risk-free return of 4% or 5% because of the quick rate rises implemented by the Federal Reserve. This is often twice as much as the yield offered by savings or checking accounts.

 

As a consequence of this, affluent investors and family offices have been transferring almost all of their cash balances into assets that are similar to cash but offer greater yields. These investments are often not included on the balance sheets of banks since they are not considered cash.

 

Around the same time period, a number of large investors started moving their money out of stocks and other assets owing to worries about increasing interest rates and the possibility of a recession.

 

According to Zeuner, for a significant number of years, cash was just not an intriguing investment. Since it did not pay anything, very few individuals were concerned about their cash holdings.

 

Throughout the course of the last year, many families have begun to remove some of their risk exposure as a result of rising interest rates and the growing concern that the economy would enter a recession. The money was put into cash. Because of this, cash has all of a suddenly become a lot more essential portion of the portfolio from an investing standpoint.

 

When investors are worried about the safety of their cash deposits, Zeuner recommends that they ask their banks or financial advisers two fundamental questions: how their cash is being spent, and whether or not their cash is included on the bank's balance sheet.

 

However, if the cash is invested in treasuries and other financial products, there is a good chance that it will not be included on the bank's balance sheet. As a result, it will not be in danger in the event of a bank run.

 

Large investors have been gradually transferring their cash holdings out of banks and into custodial accounts held by brokerage firms and financial services companies like Fidelity and Pershing.

 

They believe that custodial accounts give the majority of the features of a bank account, such as the capacity to make wire transfers, write checks, and pay bills, but without the same hazards as a bank account and with greater mobility.

 

According to Dwyer of NewEdge Wealth, the majority of their customers had their assets held with Fidelity, which is not a bank and hence provided a high level of reassurance for those individuals.

Mortgages and other types of loans

Banks will continue to be the primary source of funding for wealthy individuals and family offices that manage wealth. Yet, according to some financial advisors, the practice of banks demanding that rich customers provide them deposits or main banking accounts in return for loans may soon become obsolete.

 

According to Dwyer, consumers are also aware that they can often get reasonably priced loans from a number of different banks, and as a result, they do not need to put their cash deposits at risk.

 

According to Dwyer, “I think families are realizing that there are 4,000 banks in the United States, so someone will lend them money when they need it.”

Significance of SVB

A mid-tier bank rather than one of the main competitors, SVB had the position of being the 16th largest bank in the US during its heyday. According to the data given out by the Federal Deposit Insurance Corporation, the financial institution had accumulated $209B in assets and 175.4B in total deposits as of the end of December.

 

In contrast, the assets of the largest bank in the United States, JPMorgan Chase, totaled $3.67 trillion in the previous year.

 

Despite this, SVB was able to exert a substantial amount of influence throughout the tech industry. The lender had a strong network of contacts among the elite of Silicon Valley, and they had a reputation for investing in companies that bigger financial institutions could see as being too risky for them to finance.

 

According to reports, the fall of SVB caused several top executives in the IT industry to scramble to switch banks and explore methods for paying personnel out of worry that they would not be able to access their assets.

 

Although if SVB's clients finally got their deposits insured, it may be sometime before the full impact of the lender's collapse on the startup environment is seen.

What Brought About the Collapse of Silicon Valley Bank?

The business of the bank, which goes by the name SVB, concentrated mainly on new ventures in the technology industry in the United States. During the COVID-19 epidemic, the lender experienced an increase in deposits as internet businesses made a profit by offering individuals who were quarantined at home entertainment and delivery services.

 

The majority of this wealth was put into US government bonds by SVB, which have historically been considered to be one of the safest sorts of investments.

 

The United States Federal Reserve began rising interest rates in reaction to surging inflation last year, which caused the value of those bonds to decrease. This was the beginning of SVB's financial difficulties.

 

As a result of the pandemic, the economic climate of the technology industry deteriorated, and as a result, many of SVB's clients started to rely on their savings in order to maintain their standard of living. Due to a lack of available funds, SVB was forced to sell its bonds at a significant discount, which raised worries about the company's overall financial stability.

 

The terrified depositors had pulled out enough money from the bank within forty-eight hours to bring about its failure.

Analysis: SVB's Collapse Unlikely to Cause Financial Crisis Like 2007-2008

The recent failure of SVB has led economists and investors to express anxiety! Nonetheless, most of them think that it is very improbable that this would result in a financial catastrophe on par with the one that took place in 2007-2008.

 

The failure of organizations such as Bear Stearns and Lehman Brothers, who had considerable transactions with other banks and were active in many sectors, contrasts with the fact that SVB's operation was focused on a single industry and had a minimal amount of engagement with other banks.

 

The active engagement of the Federal Reserve, which includes the guarantee to safeguard uninsured deposits, has also helped to assuage some of the worries that have been expressed.

 

During the financial crisis of 2007–2008, there has been a significant lessening of risk associated with banking institutions as a result of enhanced regulation, including higher capital requirements.

 

As a consequence of this, even when banks make errors, they mostly lose their own money rather than the money that depositors have given them.

 

Another tool that might reduce the contagion caused by the collapse of SVB is called the Business Term Facility Program, or BTFP for short. Because of the BTFP, banks are able to borrow against assets at their face value, which frees them from the need to sell those securities at a loss and gives them the liquidity they require to fulfill any unforeseen cash demands from their depositors.

 

While it is not yet known if the Bank Transfer Fund Program will be successful in averting broad consequences from the collapse of SVB, the majority of economists think that the great majority of banks in the United States are in good financial standing.

 

As a result, depositors ought to have a sense of relief given the additional precautions that have been put into place to avert a financial disaster.