2023 Q1 In Review - Integrity Wealth Advisors, Ventura & Ojai, California

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SILICON VALLEY BANK COLLAPSE – WHAT HAPPENED? BANKING ON LIQUIDITY In the wake of the stunning Silicon Valley Bank (SVB) crisis in which the bank was ultimately shut down by regulators, there is growing concern that similar issues could spread to other US banks in the coming months. Let’s examine what happened to SVB and the potential for contagion across the banking industry. THE BACKSTORY Banks are big investors in assets like Treasury bills because they need safe places to park deposits. Over the past several years, financial institutions have piled into T-bills during a period of historically low interest rates. The problem this created for banks is simple: when rates moved higher as the Federal Reserve sought to combat inflation, it lowered the value of existing bonds on banks’ balance sheets. The FDIC in February reported that US banks’ unrealized losses on available-for-sale and held-to-maturity securities totaled $620 billion as of Dec. 31, up from $8 billion a year earlier before the Fed's rate push began (see chart to the right). This is an issue for all banks to varying degrees. For SVB the problem was particularly acute. Banks don't have to realize losses on bonds that may have gone down in value amid rising rates if client deposits remain sufficient to cover liquidity requirements. But SVB, being a venture capital and tech-focused bank, has clients with a high rate of cash burn. The bank needed ongoing deposits to cover the liquidity demands from their clients, particularly with decreasing bond values. When ongoing deposits dried up SVB was forced into selling these securities at significant losses. The good news is that the biggest US banks are much stronger than they were in the lead up to the last big banking crisis of 2008, in part because regulators forced them to hold more capital and survive numerous stress test scenarios over the last decade and a half. Also, the giants have more diverse funding and customer bases than banks such as SVB, which gives them many more options during challenging times.
2023 Q1 IN REVIEW CASH BEING YANKED OUT OF BANKS AND STASHED IN MONEY MARKET FUNDS January1988 – March 2023 $6,000 $5,000 Money Market Fund Assets, in Billions $4,000 $3,000 LIQUIDITY IS KEY One thing to keep an eye on moving forward is overall market liquidity. Liquidity is key for banks. Unfortunately, we’ve been steadily seeing the money supply decline. M2 data for January 2023 was at -1.726% YoY; December 2022 was -1.31% YoY. There has never been a negative M2 print in modern history (dating back to at least 1959) prior to now, so we’re in somewhat uncharted territory in that regard. 25 20 15 Federal Reserve Money Supply M2 YoY % Chg - Mid Price $2,000 $1,000 $0 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 -$500 Savings & Loan Crisis U.S. Bank Deposits, Change in Billions from a Year Ago Financial Crisis Pandemic, Govt. Stimulus -$1,000 1988 1991 1994 1997 2000 2003 2007 2010 2013 2016 2019 2022 Source: ICI, Federal Reserve, Bloomberg, U.S. Global Investors 10 5 0 1960-1969 1970-1979 1980-1989 1990-1999 2000-2009 2010-2019 -1.7 While it seems unlikely at this time that the broader banking system will face anything close to the issues SVB was faced with, further challenges are likely to surface. However, it’s important to recognize that current financial problems are very different from those of 2008-09. Back then, the main issue was credit risk (primarily regarding residential real estate loans and securities) and how markets were pricing that risk. Today the primary issue is interest-rate risk (or duration risk) on high-quality bonds. But the Federal government has taken steps to protect the financial system from a run on the banks in the near future. One such effort is that they have set up a new facility for banks that lets them, in effect, offload those securities to the Fed for a small fee, papering over balance sheet problems for banks able to take a small hit to earnings. Source: Kensington Market Insights - March 16 (kensingtonassetmanagement.com); First Trust Monday morning Outlook 3/27/23
Page 1 and 2: iwaplan.com Q1 2023 IN REVIEW
Page 3 and 4: A WILD RIDE TO START THE NEW YEAR 2
Page 5: STOCK AND BOND CORRELATION 2023 Q1
Page 9 and 10: SINCE MARCH 2020, WE HAVE SEEN: 202
Page 11 and 12: INVESTMENT COMMITTEE 2023 Q1 IN REV
Page 13 and 14: Future FINANCIAL four-year college
Page 15 and 16: HOW DOES DONATING TO CHARITY REDUCE

2023 Q1 In Review - Integrity Wealth Advisors, Ventura & Ojai, California

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