Is It Time to Rethink Your Cash Holdings?
March 20, 2023 | BY Our Partners at Equinum Wealth Management
As you are already aware, both Silicon Valley Bank and Signature Bank have entered into receivership programs from the federal authorities. Last weekend was a long and daunting one. Companies banking with these institutions were nervous about their unsecured deposits, which were necessary to meet payroll and other basic business functions. The Federal Reserve stepped in, took over the operations of both banks and announced a new program called the Bank Term Funding Program (BTFP) to try and quell the flood of withdrawals from other regional banks. This program allows banks to pledge certain assets that have lost market value due to the dramatic increase in rates as a result of Federal Reserve tightening, which began this time last year.
How much the Fed will be able to cover is still unknown. Should we consider all bank deposits guaranteed, even above the official $250,000 threshold? Will they keep this program for all future bank failures?
Besides the two banks previously mentioned, along with Silvergate – which was shut down earlier last week – there are many other banks in the limelight. Many publicly traded regional banks’ stock prices were down 50% or more on Monday alone – and the market is saying that this is only the start.
The biggest concern is that things are moving extremely fast. Just last week Wednesday, Federal Reserve Chair Jerome Powell testified in front of Congress stating that they aren’t seeing any issues in the banking world from the rate-hiking campaign they have been on over the last year. Since then, three banks with hundreds of billions of dollars of assets had to be bailed out!
So, what does this mean for us now? We believe this is a prudent and opportune time to rethink where and how we hold cash deposits. There are the large, ‘too-big-to-fail’ banks that many consider as safe as some government programs. Then there are the local regional banks that each bring along some benefits. The larger institutions offer safety to your assets, while smaller banks can give you higher yields, certain services and respect that only Fortune 500 companies get at the larger banks. The issue is that typically, these two are mutually exclusive. It’s rare to have safety and liquidity, along with higher interest, at the same institution.
Our wealth management partners at Equinum would like you to consider a third option – U.S. Government treasury bonds held in a brokerage account. Not only does this offer both security and higher yields, but it also offers tax advantages in some cases as well. Government treasures are backed by the full faith and credit of the United States Government. This is an assurance that supersedes the ‘too-big-to-fail’ status of some banks, and is on par with FDIC insurance as it relates to security. On top of this, yields are currently in the 4.5% range for short term treasuries. Obviously, for core banking functions and payroll processing, you will still need to have banking relationships. But for larger balances not needed for day-to-day operations, it’s imperative to consider where these assets are being held.
Keep in mind that there’s a key difference between assets held in a bank account versus those in a brokerage account. When you deposit $1,000,000 in a bank account, the bank takes most of that cash and invests the money into other things – mostly in new loans or existing fixed income investments. Your money is effectively mixed together with all the other bank depositors and invested by the bank. The bank has certain requirements as to what percentage of deposits need to be liquid, but that number is really small – currently just 10%. There are other ratios and stress tests that banks must adhere to, but as we all see with last week’s failings, there are obviously still risks out there.
Contrast this with brokerage accounts: When you hold an asset in your brokerage account, it’s in your name. You own the shares of the companies you invest in and can vote your ownership the way you want. You own the bond and receive the interest payments. Each respective client’s assets are in a segregated account held at the custodian in the client’s name. Even if something were to happen to the custodian, client assets are protected and secure. Even creditors would have no claim on client assets.
Each family and company’s situation varies – there’s no silver bullet to cover all circumstances. This is just something to consider in the current unique situation.
Always feel free to reach out to us or to our partners at Equinum.
This material has been prepared for informational purposes only, and is not intended to provide, nor should it be relied upon for, legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.