Coaching your clients through market uncertainty
Help keep your clients’ investments on track when markets are volatile – our experts' views on the economy, markets and how best to achieve investment success in the long run.
The market reaction to the collapse of First Republic Bank—the third US regional bank failure in less than two months—has so far been relatively subdued. Nonetheless, it highlights the challenges facing policymakers and continues to test investors’ long-term focus.
On 1 May, the Federal Deposit Insurance Corporation (FDIC) announced that First Republic Bank, the 14th-largest US commercial bank by assets as at year-end 2022, had been taken over by the FDIC and would be sold to JPMorgan Chase Bank. As a result of the transaction, all depositors of First Republic Bank will become depositors of JPMorgan Chase and will have full access to their deposits.
At Vanguard, we continue to encourage investors to avoid speculation and trading on emotion, and to focus instead on the long term and factors within their control.
Here we provide background on recent stress in the US banking system, summarise the limited exposure of US- and ex-US-domiciled Vanguard funds to First Republic (ticker: FRC) and offer perspective for investors.
Trouble at First Republic emerged in March—when its share price plunged nearly 90%—amid the collapse of Silicon Valley Bank and Signature Bank. Silicon Valley Bank suffered a run on deposits by customers concerned about its ability to meet its liabilities, given declines in the value of its assets. The bank had substantial holdings of long-term US Treasuries and mortgage-backed securities, which lost value in 2022 as the US Federal Reserve (Fed) raised interest rates to tackle inflation. Regulators closed Silicon Valley Bank on 10 March and, two days later, Signature Bank was also shut down. The FDIC fully protected all depositors, insured and uninsured, at both banks.
Net deposit withdrawals by depositors at First Republic during the first three months of the year totalled more than $70 billion, equivalent to around 40% of all the bank’s deposits as at year-end 2022, according to the bank’s first-quarter earnings release, which was issued on 24 April. The figures would have been even worse if not for the injection of $30 billion in deposits by some of the largest US banks in an effort to stabilise First Republic. The bank also increased its borrowings sevenfold.
After those disclosures, First Republic’s share price further collapsed over the past week, hastening its seizure and sale. The three bank failures are likely to lead to tighter regulation and supervision by US federal and state authorities, who will be challenged with ensuring bank stability while enabling credit growth.
On behalf of its investors, certain Vanguard funds owned securities issued by First Republic, including equities and bonds. As at 31 March 2023, the aggregate exposure to First Republic in US- and ex-US-domiciled Vanguard funds represented less than 0.01% of all such funds’ assets.
As global central banks continue to grapple with persistent inflation, we believe that rapid monetary tightening aimed at bringing down inflation will ultimately succeed - but at the cost of a global recession in 2023. Restrictive monetary policy stresses the banking system and slows credit formation. The tension between central banks’ inflation-fighting mandates and their financial stability goal could spur greater market volatility in the coming months.
For investors, unexpected and fast-moving economic or financial market news can be disquieting. In the vast majority of cases, however, we believe that investors benefit in the long run by sticking with well-considered financial plans and portfolios.
In particular, we believe investors should focus on:
In general, investors should change their portfolios only when there are meaningful shifts in their investment horizons, goals or financial circumstances, and not in response to short-term market conditions or performance.
Investment risk information
The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.
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The information contained in this document is for educational purposes only and is not a recommendation or solicitation to buy or sell investments.
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Issued in Switzerland by Vanguard Investments Switzerland GmbH.
Issued by Vanguard Asset Management, Limited which is authorised and regulated in the UK by the Financial Conduct Authority.
© 2023 Vanguard Group (Ireland) Limited. All rights reserved.
© 2023 Vanguard Investments Switzerland GmbH. All rights reserved.
© 2023 Vanguard Asset Management, Limited. All rights reserved.