Advisors to Clients on Banking Crisis: ‘Don’t Panic’
In the past few weeks, we’ve seen the collapse of two relatively small banks that were not considered to be “systemically important” and the rescue of Credit Suisse by its fellow Swiss financial institution UBS.
That alone has been enough to give investors jitters. But with inflation high and the Fed seemingly determined to continue hiking rates, the banking disasters sent related exchange-traded funds into a tizzy of volatility.
While broad financial equity ETFs covering the U.S. and Europe are down between 10% and 11% since the Silicon Valley Bank disaster kicked off on March 8, ETFs focusing specifically on banks were essentially hit twice as hard.
The $3.1 billion SPDR S&P Regional Banking ETF (KRE) is down nearly 24% in less than two weeks, and the $1.3 billion SPDR S&P Bank ETF (KBE) is down 21% while the $1.4 billion Invesco KBW Bank ETF (KBWB) fell 23.5%.
Vance Barse, founder and wealth strategist of Your Dedicated Fiduciary, and Marguerita Cheng, CEO and founder of Blue Ocean Global Wealth, say investors should remain calm and not do anything rash.
Bank Crisis Sparks Fear
“I think the 24-hour news reel on the banking crisis has served as great fodder for the masses to live in their amygdala function, which has resulted in a lot of panic calls because it reminds people of the fear that was so rife throughout the 2008 crisis,” Barse said, referencing the part of the nervous system that handles responses to threats and fear.
“It's prudent to proceed with caution and really understand what's in a portfolio and what due diligence and risk management measures should be employed, because we're living in a world where monetary policy seems to change by the minute,” he added. He advises that individuals set emotions aside and look analytically at the situation and how it is different from 2008, not least because there is not as much leverage in the market.
However, Barse thinks investors who focus on the bank collapses are missing the real story around what he describes as the “massive volatility” that has been seen in interest rates and yields recently.
He notes that the massive moves in Treasury securities are reminiscent of those seen around the time of the 1987 stock market crash. His key takeaway from what occurred in 2008 and more recently with regard to Silicon Valley Bank and Signature Bank is simply that we are currently seeing the fallout from the rapid increase in interest rates hitting the banking industry, even as the Fed takes steps to shore up the banking industry.
He emphasizes that the government does not want the banking system to fail: “There's been no shortage of reassurances from key members of the government that our banking system is well capitalized and, ‘everything is fine.’”
“I just think that the playbook needs to be updated, both at the Fed and also with respect to stewards of capital and self-directed investors,” Barse added. He labels the lens through which those entities viewed markets and the economy from 2009 through 2021 as “the old playbook.”
“We now have real inflation; fundamentals matter; and it's a new paradigm,” he concluded.
Understanding the Crisis
Cheng, whose practice serves many small business owners, says that her first step is to acknowledge that the situation is unsettling.
“I am not a therapist. I am not a policy expert. But I explain things,” she said of her role.
Cheng has been emphasizing to her clients that individual bank accounts are insured by the FDIC for up to $250,000. For some businesses, like those involved in construction, there may be more money held in cash, so she advises her clients to diversify their banking relationships so that their money is held across more than one institution at any given time.
She also understands how disturbing it is that Credit Suisse, domiciled in a country known for its expertise in banking, was the financial institution that needed rescuing, though she asserts that Credit Suisse has been mismanaged since at least 2020. Still, Cheng believes that the banks themselves are sound, and what has been unfolding is more of a liquidity issue ultimately caused by the hikes in interest rates than anything else.
If you want to be tactical, she says, there’s an opportunity to buy bank stocks at low prices right now. As a planner though, Cheng advises against going “all in” on the sector.
She also notes that I-bonds, a Treasury security with interest rates tied to the inflation rate, are still attractive, even if an individual can only buy $10,000 worth of them in a calendar year. Cheng urges investors to continue to contribute to their retirement accounts at the same level in order to take advantage of dollar cost averaging.
Contact Heather Bell at heather.bell@etf.com
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