Will the Current U.S. Banking Crisis Impact My Retirement?
As we move through 2023, the global economy has been experiencing some significant changes. Unfortunately, one of these has been the failure of several prominent U.S. banks; specifically, Silicon Valley Bank, Signature Bank, and First Republic Bank. Understandably, these failures have caused many retired or soon-to-be retired Americans to question whether they can rely on their banking partners for the long haul. This is an important topic, so let’s discuss it.
The root causes of these bank failures are complex and varied, ranging from poor management decisions to economic instability to a phenomenon called “yield curve inversion”. Whatever the cause, the results are always the same. Customers lose access to their accounts, loans, and investments. And investors lose millions of dollars.
Resilient U.S. Banks Still Remain
However, it's important to remember that not all banks are struggling. In fact, there are several U.S. banks that not only have weathered past and current storms, but even seem to grow stronger through these crises.
Two examples are JP Morgan Chase and Goldman Sachs.
JP Morgan Chase has over $2.7 trillion in assets, making it the world’s largest bank by market capitalization. In both the 2008 and current crisis, JP Morgan Chase successfully entered into special agreements with the U.S. Government and FDIC in order to strategically purchase Washington Mutual (2008) and First Republic Bank. Clearly, all indicators show that JP Morgan Chase knows how to weather even the toughest of economic storms.
Then there’s Goldman Sachs, the second-largest investment bank in the world by revenue. The bank has been in business for the last 150 years, and historically has serviced large institutional investors, corporations, and governments. But in 2016, Goldman Sachs expanded into the individual and small business financial services market. The end result is a well-capitalized and deeply experienced bank that’s operating in an incredibly diverse number of financial markets.
Of course, the two examples above are not the only resilient banks in the U.S. Many others are also thriving under these conditions. The key for you - someone who’s retired or preparing for retirement - is choosing a banking partner who will remain stable for the long term.
Four Tips for Choosing a Steady Banking Partner
You worked hard for your money. Your retirement is a time to enjoy it and not to be spent worrying about the solvency of your bank. Additionally, your retirement will likely last longer than you ever expected! Meaning, who you choose as your banking partner is important.
So here are four tips to help you make your selection:
- Research: Specifically, see if the bank has a track-record of financial stability, especially during the hard times. Look for positive earnings and a healthy balance sheet. Check the bank's financial rating with independent rating agencies such as Moody's or Standard & Poor’s.
- Insurance: Make sure your banking partner is insured by the FDIC or a similar government-backed insurance program. In a worst case scenario, up to $250,000 of your deposits are covered.
- Size Matters: Our current banking crisis is hurting smaller and regional banks while the larger banks appear to be more immune to the prevailing economic headwinds. So if you’re especially concerned about your banks financial stability, then consider partnering with a larger bank. Check to see if the larger bank is designated as a systematically important financial institution by the Financial Stability Board.
- Level of Customer Service & Product Offerings: A bank’s customer service and product offerings might give you a unique perspective on how they’ll respond or manage through a crisis. Exceptional customer service indicates an internal culture that puts the client first. Better to be partnered with a bank that prioritizes you first, especially when times get tough. And a bank that offers a diverse menu of product offerings indicates flexibility and resiliency. The more avenues your bank has to make money, the more likely it will remain afloat in rough waters.
These tips aren’t a panacea, but they can assist you in choosing a bank that’s more likely to remain stable during a banking crisis. Finally, I would recommend periodically monitoring your bank's financial stability metrics and performance indicators. If you notice signs of trouble, don’t be afraid to take the actions necessary to protect your hard earned investments.
Closing Thoughts: Diversification
One lesson this current banking crisis has reiterated to me is the sheer value of investment diversification. The collapse of First Republic Bank was a shock to many people. This bank was considered a rock-solid regional bank with an established, wealthy, and loyal client-base. And seemingly overnight, it failed and the stock collapsed. So if your wealth is highly concentrated in any one stock, one asset, or even one bank, then take this opportunity to diversify.
Case in point: On the day First Republic dissolved into JP Morgan Chase, how did that event impact the S&P 500?1 When the market closed, the index was down 0.039%. So why risk so much money on one stock when ETFs and index funds are available.
Diversification is the key and your best friend when investing. Even in a banking crisis.
This commentary reflects the personal opinions, viewpoints and analyses of the Seaside Wealth Management, Inc. employees providing such comments, and should not be regarded as a description of advisory services provided by Seaside Wealth Management, Inc. or performance returns of any Seaside Wealth Management, Inc. client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this commentary constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Seaside Wealth Management, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.