A large part of banks’ investment portfolios use an accounting method called “held to maturity” that ensures the firms don’t have to record any losses, or any hits to their balance sheets, from the declining value of their bonds. These factors helped create a perfect storm.īut even for banks that dodge the storm, bond losses are a problem. There were at least three data points for SVB that worried depositors: the speed at which the bank’s deposits had grown, the high percentage of uninsured deposits it had, and the magnitude of losses relative to its equity. Clients with high balances at a bank are often skittish about the safety of their funds and more likely to withdraw money fast at signs of trouble. That translated to a high percentage of customers’ deposits being bigger than US deposit insurance limits. For SVB, they spelled trouble in part because its clients tended to keep large balances at the bank as a condition for receiving services like lines of credit. Rising deposits on their own don’t necessarily represent a problem for banks. SVB’s domestic deposits, for instance, rose more than 150% from the end of March 2020 through the end of 2022. All that cash the Fed and the government pushed into the economy quickly found its way into the banking system, giving lenders trillions of dollars to invest. Losses on bonds are a risk whenever rates go up, but banks’ holdings were bigger than usual in 2022. The value of those bonds plunged, because who would want to buy an old bond paying 0.6% interest when new ones were suddenly paying more than 3%? Then inflation surged and the Fed started urgently driving up interest rates. There were some Treasury notes that promised to pay annual interest of just 0.6% over 10 years. When the pandemic hit, and the Federal Reserve pushed down rates once again by pumping unprecedented amounts of cash into the economy, many banks loaded up on long-term government and mortgage-backed bonds. Read More: Flight to Money Funds Is Adding to the Strains on Small Banks “They’re paying more for deposits, and their earnings on bonds are fixed,” said Stan August, a retired bank examiner for the Federal Reserve Bank of Richmond and a former bond analyst at Bank of America. That in turn could curb their ability to lend to consumers and businesses, slowing the economy. They’re being pressed to pay more for funding while their revenue is limited by the investments they made in low-yielding bonds during the pandemic. This safeguard as well as the 30-day draw minimizes any negative impact or potential harm that the additional need for liquidity may create for the overall program.And yet as depositors keep gradually withdrawing their money and shifting it into money market funds and other investments, banks are facing a squeeze. Reopening of the same account or re-depositing of funds from a prior issue to establish a new account is not permitted. Bond proceeds are deposited into an account and funds are withdrawn until depleted. Therefore, bond accounts are one-way accounts. Due to the nature of bond accounts, a drawdown schedule is required as part of the application. The Treasurer’s investment program is designed to benefit all members of the Pooled Money Investment Account, which LAIF is a participant. The withdrawal date will advance to the next business day and the 30-day period will go forward from that date when the maturity day falls on a holiday or a weekend. Bond proceeds may be withdrawn 30-calendar days from the day of deposit and each subsequent 30-day period. Regular LAIF accounts are subject to a $75 million cap and 15 transactions a month, while bond accounts are one-time deposits and have no cap. Note: Local agencies that wish to open a new account with LAIF, please contact the LAIF staff at (916) 653-3001. Additionally, local agencies may deposit bond proceeds (one-time deposit) by following the aforementioned procedures, completing a bond application, and submitting all the original documentation with a completed copy of the Official Statement. Local governmental agencies may participate in LAIF by filing a resolution adopted by the agency’s governing board with the State Treasurer’s Office and by completing and submitting a New LAIF Account form.
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