The Banker recently published a story titled, "Uninsured deposits could pose a threat to financial stability," which is subtitled, "Nearly a year on from SVB's demise, regulators are still asking whether deposit insurance schemes are fit for purpose." It states, "The failure of Silicon Valley Bank in March 2023 has been described as a textbook case of a bank run. While bank runs have always been a feature of banking history, SVB's case brought into focus how highly concentrated business models and overreliance on uninsured deposits in banking can pose risks to financial stability. Both of these issues represented key vulnerabilities at SVB. Of the bank's total deposits, 93.8 percent were uninsured, according to S&P Global Market Intelligence data as of year-end 2022. It mostly served clients in the tech sector. While SVB was an outlier in terms of its business strategy, to what extent could similar vulnerabilities affect other banks in the future?"
The piece quotes Gerald Epstein, professor of economics at the University of Massachusetts Amherst, "There is [an ongoing] discussion in the US about how to manage the huge pools of cash that technology firms hold in reserve. It's a really fragile part of the international financial system because this cash can just run on a moment's notice. Beyond what's covered by deposit insurance, who should be responsible for maintaining the security of this?" It tells us, "A 2023 Moody's report looked at the total cash held by 962 US non-financial public companies and found that, of the sectors examined, tech accounted for the highest amount with 34 percent, followed by healthcare and pharmaceuticals with 9 percent, and services with 8 percent."
The Banker says, "As low interest rates propelled growth at venture capital and technology firms, SVB expanded as well. Between 2019 and 2021, the bank tripled in size as it benefited from rapid deposit inflows, according to a 2023 note from the US Federal Reserve. SVB was reliant on huge amounts of deposits from a very tight-knit community. 'This is an industry based on social connections and herd behaviour. It seems [venture capitalists] got their money out first and then told their portfolio companies to get out [of SVB],' says Hilary J. Allen, professor of law at the American University Washington College of Law."
It explains, "Following SVB's demise, some institutions have begun to look at deposit insurance more closely. The growth of uninsured deposits has increased the exposure of the banking system to bank runs, admitted the FDIC in a 2023 report. At its peak in 2021, the proportion of uninsured deposits in the banking system was 46.6 percent, higher than at any time since 1949. 'Large concentrations of uninsured deposits, or other short-term demandable liabilities, increase the potential for bank runs and can threaten financial stability,' reads the report."
It adds, "Moreover, there is evidence that uninsured depositors have become de facto insured, generating moral hazard. Over the past 15 years, uninsured depositors have experienced losses in only 6 percent of US bank failures, resulting in at least $45bn in additional resolution expenses, according to a paper by Michael Ohlrogge, associate professor at NYU School of Law. This has turned deposit guarantee schemes on their head, as they were conceived as protection for consumers and households, rather than large companies or investors. In 2023, the FDIC and Federal Reserve exceptionally extended protection to uninsured depositors at SVB as the bank saw remarkable deposit outflows."
In other news, an old SEC filing for Hewitt Series Trust tells us, "[T]he Hewitt Series Trust ... and its sole series, the Hewitt Money Market Fund ... will be rebranded. On that date, all references in the prospectus and Statement of Additional Information to 'Hewitt Series Trust' as the name of the Trust will be replaced with 'Alight Series Trust' or 'Alight Series Trust (formerly known as Hewitt Series Trust)', and all references in the prospectus and Statement of Additional Information to 'Hewitt Money Market Fund' will be replaced with 'Alight Money Market Fund' or 'Alight Money Market Fund (formerly known as Hewitt Money Market Fund)'. There are no other changes to the Trust or the Fund."
Another filing for Federated Hermes New York Municipal Cash Trust says, "On February 15, 2024, the Board of Trustees of Federated Hermes Money Market Obligations Trust approved amending the principal investment strategies of Federated Hermes New York Municipal Cash Trust ... to permit the Fund to regularly invest in securities subject to the federal alternative minimum tax (AMT), rather than invest in such securities on an exception basis. This change is effective on May 6, 2024. As a result of the change, interest from the Fund's investments and the Fund's distributions to shareholders may be subject to AMT. Additionally, the Fund may have enhanced liquidity and diversification as a result of an expanded universe of investment opportunities."
Finally, the Public Funds Investment Institute says, "Illinois LGIP Could Open a Pool for Non-Profits." The brief explains, "The Illinois Treasurer is seeking authority to create a local government investment pool for non-profit organizations. Senate Bill 3157 (and an identical bill in the House) would authorize a Non-Profit Investment Pool to operate in a manner similar to the Illinois Public Treasurer's Pool (Illinois Funds), the $19 billion state-sponsored LGIP."
It tells us, "A background memo in support of the legislation notes that the proposed fund would be 'identical' to the Illinois Funds pool which operates like a Securities and Exchange Commission Rule 2a-7 money fund, although it is not registered as a mutual fund under Federal securities laws. According to the memo the pool would 'fill a gap for medium sized non-profit organizations and would provide an investment option for hundreds of Illinois organizations.'" (Note: Crane Data's Peter Crane will be presenting at next week's Government Investment Officer's Association (GIOA) conference in Las Vegas. We hope to see you there!)
