With all goings on in the American and world banking systems, CNBC recently published a list of banks with the most uninsured deposits, that is, deposits above the $250,000 FDIC limit. Here’s part of that list:

Bank                                         % of deposits above the FDIC limit and uninsured
Silicon Valley Bank (SVB)          94%
Signature Bank                            90%
Citibank                                         77%
JP Morgan                                    53%
Wells Fargo                                  52%
Goldman Sachs                           47%
Bank of America                         47%

I wasn’t aware it was this much, so to me the numbers were shocking. We would never recommend going above the $250,000 limit. Well, maybe for a week, or maybe with $260,000. SVB had about a thousand venture capital and tech startups with their deposits there, and one, ROKU, had $487 million on deposit, according to Reuters. SVB had the choice of putting most or all in T-Bills (less-than-1-year government securities) or Treasury Notes (2-10 years) or Treasury Bonds (11 years and up). I’m going over this example because its considerations also apply to individual investors. In the last 3 years, 3-month and 6-month T-Bills went from 0% to 5%. 10-year Treasury notes went from .6% to 4%. The bank chose 10-year notes even though the rate was awful because the T-bill rate was non-existent. The FED worked for decades to get the rates this low, so I can imagine the banks may have thought it was permanent.

So, when 3- and 6-month bills were 0% three years ago, it looked smart to get .6% on 10-year notes. The depositors presumably had faith that the bankers knew what they were doing. After all, when you make a $400 million deposit into a bank, you could be lulled into thinking the money is safe. If the bankers thought that the rates were permanent, then the .6% on the 10-year Treasury was better than the 0% on the T-Bills, and government bonds wouldn’t default. So they had the credit risk covered. But they forgot about, or ignored, interest rate risk. When interest rates move a little, like 2% to 2 ½%, things should remain calm. But 0% to 5% is traumatic, especially when you’re talking a lot of bonds. And, nobody is real sure what lies in the future. One thing is for sure now, and that is the FED wants rates down badly. But the FED is between “a rock and a hard place.” If they lower rates, inflation may run hotter. If they raise rates, they will exacerbate the problem with the banks, which follows here.

This could be a refresher course in interest rate risk. Suppose an investor has a $1,000 10-year Treasury Note paying 1%. Then there’s a significant increase in the rate of new bonds, shown above. The value of the investor’s bond may go to $850, because it’s a marketable security, and buyers would prefer the new ones paying 4%. The $150 market loss is relatively insignificant, and if the bond is held to maturity it will redeem at $1,000 and the interest will be paid during the term. If you add a lot of zeroes to this scenario in the absence of cash budgeting and liquidity needs, it could create a huge problem. Many of Silicon Valley Bank’s customers had trouble raising money in the capital markets because of stock and bond market turmoil, so they turned to the bank to withdraw their funds. Unfortunately, too many came for funds and SVB would have had to sell their bond portfolio for huge losses to meet the demand for funds. The WSJ reported that SVB had a gap of $17 billion between the face value and market value of their bonds as of Dec. 31, 2022. The bank failed and had to be bailed out by the U.S. government. Of course, all of the deposits over the FDIC limit of $250K will be made whole. This is bad in so many ways. Many experts agree that this bailout and others to come is tacit admission that the trillions of dollars in deposits over the $250K FDIC limit is now being backed by the “limitless” borrowing of the federal government. This virtually eliminates any accountability of banks’ management. In the real world of individual investing we don’t have that luxury, nor do we want it. Institutions should also be held to the same fiduciary responsibility.