By Tom Frank, Executive Vice President, Northern California Regional Manager, Whittier Trust

The topic of estate planning frequently conjures up ideas about leaving money to heirs. However, recent statistics from the U.S. Census Bureau indicate that more than 16% of Americans do not have biological children. Additionally, there may be many more cases where people feel like they have already given their biological heirs plenty of assets and aren’t interested in further enriching them. Over the course of decades of working with wealthy families, Whittier Trust has seen the gamut of situations—people who want their families to keep every dime possible and others who feel that enough is enough at a certain point. This raises the question, What should I do with my money if I have no heirs? Common wisdom suggests there are three possible places for wealth to go upon death: family and friends, charity or the government. 

If there are no family members, where should we look next? It’s common for people to want to make gifts to close friends. This raises questions about when to give the money, how to structure a gift and how much to give. Sometimes gifts during the donor’s lifetime are the most effective because we get to see the money help our friends. Lifetime giving is relatively easy, as it’s possible to give cash or potentially other assets. While a gift is not income taxable to the recipient, they do take the gift with the donor’s tax basis. This is something to consider when gifting assets other than cash. 

Take for example, a tech entrepreneur who wants to give stock in their company to a friend. While the face value of the gift (and the amount reportable on a gift tax return) is the fair market value of the stock, the friend receives the gift with the donor’s tax cost basis. So if it's the founder's stock, for example, it may have a basis of $0 or close to $0. That means if and when the friend sells the stock, they will have to pay capital gains taxes on the proceeds. In such a case, while a gift is still generous, it’s likely a lower value than a cash gift might be. 

If the same gift of stock is made at the donor’s death, the tax code permits a “step-up” in the cost basis to market value on the date of death. Any gift made at death passes free from any unrealized capital gain. So, it’s probably advisable to make lifetime gifts with cash rather than using appreciated assets.

What about a large gift to a friend? There will naturally be considerations of how this may affect the dynamic of the friendship, but aside from that, it’s important to consider whether the friend is capable of managing a large gift. The same concern might exist if it is a gift of complex property, either a portfolio of stocks and bonds or something like real estate. In such an instance, it may be advisable to consider making the gift to an irrevocable trust for the benefit of the friend. A professional trustee would be able to carefully manage the gift, while still making sure that funds are available to enhance the friend’s lifestyle or provide for necessities. Irrevocable trusts also confer asset protection benefits by protecting the assets from creditors of the friend. 

No discussion of gifting beyond family and heirs would be complete without discussing gifts to charity. Direct gifts to charity are usually pretty straightforward. Gifts of cash and appreciated assets may be made to public charities quite easily. The main consideration when gifting to a public charity is one of structure. If the gift is particularly large, does the charity have the ability to properly manage and steward the gift or will it be overwhelmed? If the latter is a concern, spreading the gift out over a number of years may make sense. Alternatively, making the gift to a donor-advised fund (DAF) that will then parse the funds out over time is often an excellent solution. 

Some donors want the recognition and flexibility of creating a private foundation, though there are administrative burdens and expenses that come with that approach. It’s easy to get tripped up by the rules, so expert advice is highly recommended. Also, private foundations are less attractive if the donation of assets such as appreciated real estate are contemplated since a donor can only deduct their basis in the property (which may be depreciated) rather than the full fair market value. An additional point for consideration is who will manage the private foundation down the line. Again, a donor-advised fund may solve some of these issues. 

Many donors consider a split-interest trust—either a charitable remainder trust or a charitable lead trust—that will benefit friends and charity. Each of these tools are worthy of separate articles but should be on the table when thinking about planning for estate disposition beyond family members. 

Gifts and bequests beyond family members are not as simple as one might think. This is particularly the case with assets other than marketable securities or with large gifts. Expert advice and counsel, in the form of good accountants and attorneys, are essential to maximizing the benefits of any gifting strategy.

De-Dollarization

Financial markets defied expectations as fears of a sharp and imminent recession failed to materialize. The S&P 500 index gained 16.9% in the first half of 2023. The Nasdaq 100 index soared 39.4% to lead the stock market rally. And even the lagging Russell 2000 index of small company stocks showed belated signs of life and rose 8.1%. As the economy showed unexpected signs of strength, the 10-year Treasury bond yield rose above 3.8% after trading below 3.3% in early April.

Headline inflation also surprised investors with a more rapid rate of decline than expected. The Consumer Price Index (CPI) stands at 4.0% year-over-year as of May 2023 … well below its June 2022 high of 9.1%. The Fed’s preferred inflation gauge based on Personal Consumption Expenditures (PCE) is also significantly lower at 3.8% through May. Core inflation measures remain sticky for the moment but are expected to decline meaningfully in coming months.

The impact of this progress on inflation has been felt in many different areas. The Fed stopped its string of 10 consecutive rate hikes in June. It has also signaled that the skip in rate hikes could eventually lead to a longer pause in the tightening cycle. The Fed’s shift in monetary policy from rapid tightening also spilled over into other markets.

The prospects of eventually lower policy rates along with unexpected economic resilience triggered the stock market rally. And more importantly for our discussion here, it continued to extend the recent bout of U.S. dollar weakness. The direction of the dollar has recently become a topic of intense debate as a number of threats have emerged to its status as the world’s reserve currency.

We assess the outlook for the U.S. dollar in light of the recent trend towards de-dollarization. We focus specifically on the following topics.

  • Recent catalysts for de-dollarization
  • Viable alternatives to the dollar
  • Fundamental drivers of dollar strength

Let’s begin with a brief history of events that have led to the hegemony of the dollar so far.

A Brief History

We can think of a reserve currency as one that is held by central banks in significant quantities. It also tends to play a prominent role in global trade and international investments. The last couple of centuries have essentially seen two primary reserve currencies.

The British pound sterling was the dominant reserve currency in the 19th century and the early part of the 20th century. The United Kingdom was the major exporter of manufactured goods and services at that time, and a large share of global trade was settled in pounds. The decline of the British Empire and the incidence of two World Wars and a Great Depression in between forced a realignment of the world financial order.

The dollar began to replace the pound as the dominant reserve currency after World War II. A new international monetary system emerged under the 1944 Bretton Woods Agreement, which centered on the U.S. dollar. Countries agreed to settle international balances in dollars with an understanding that the U.S. would ensure the convertibility of dollars to gold at a fixed price of $35 per ounce.

The Bretton Woods system remained in place until 1971, when President Nixon ended the dollar’s convertibility to gold. As we are well aware today, the U.S. typically runs a balance-of-payments deficit in global trade by importing more than it exports. In this setting, it became hard for the U.S. to redeem dollars for gold at a fixed price as foreign-held dollars began to exceed the U.S. gold stock.

The dollar continued to maintain its dominant role even after the end of the gold standard. Its position was further bolstered in 1974 when the U.S. came to an agreement with Saudi Arabia to denominate the oil trade in dollars. Since most countries import oil, it made sense for them to build up dollar reserves to guard against oil shocks. The dollar reserves also became a useful hedge for less developed economies against sudden domestic collapses.

The dollar’s hegemonic status is important to the U.S. economy and capital markets and their continued dominance in the global economic order. The U.S. is unique in that it also runs a fiscal deficit where the government spends more than it collects in revenues. The U.S. dollar hegemony is central to this rare ability of the U.S. to run twin deficits on both the fiscal and trade fronts.

The virtuous cycle begins with a willingness by other countries to accept dollars as payment for their exports. As they accumulate surpluses denominated in dollars, the attractiveness of the U.S. economy and the faith in U.S. institutions then bring those same dollars back into Treasury bonds to fund our deficit and into other U.S. assets to promote growth.

The dominance of the dollar in the world’s currency markets is truly remarkable. Our research indicates that the dollar currently accounts for more than 80% of foreign exchange trading, almost 60% of global central bank reserves and over 50% of global trade invoicing.

The importance of dollar hegemony cannot be overstated. At the same time, its dominance in perpetuity also cannot be taken for granted. In fact, the constant assault on the dollar has already seen its share of foreign exchange reserves decline from over 70% in 1999 to just below 60% now.

A number of new threats to the dollar have emerged within the last year or so. These developments have triggered renewed fears of de-dollarization and are worthy of discussion.

Recent De-Dollarization Catalysts

The main impetus for de-dollarization in recent months stems from a rise in geopolitical tensions. The war in Ukraine has played a meaningful role in the escalation of these risks. The U.S. and its Western allies have retaliated against Russia with a number of sanctions since the war began. On the other hand, Russia’s traditional allies in the East have been conspicuously silent in their condemnation of its actions in Ukraine. This misalignment on the geopolitical front has led the BRICS bloc (Brazil, Russia, India, China and South Africa) to decouple from the U.S.

We highlight a number of catalysts that may sustain this trend to reduce global reliance on the dollar. Our discussion attempts to steer clear of any political ideology and focuses solely on the likely economic impact of actual or potential policy actions.

Preserving Monetary Sovereignty

The mere premise of trading a country’s basic goods and services in a foreign currency presents a certain level of risk to that country’s monetary sovereignty. The domestic economy now becomes more vulnerable to currency and inflation shocks as well as foreign monetary policy. This proved to be particularly true for Russia whose commodity exports are largely dollarized.

As the BRICS bloc increases its global impact and ramps up its strategic rivalry with the West, it is mindful of the need, and opportunities, to become more independent in an increasingly multipolar world.

Security of Currency Reserves

The immediate and punitive sanctions on Russia also highlighted the reach and influence of Western institutions on emerging market economies.

As an example, the freezing of Russia’s foreign exchange reserves held abroad impaired its central bank’s ability to support the ruble, fight domestic inflation and provide liquidity to the private sector as external funding dried up. The actions of the U.S. and its Western allies were a reminder of how the dollar, and other currencies, can get politically weaponized.

Russia had already started its de-dollarization in 2014 after the Crimean invasion. Russia’s central bank has since cut its share of dollar-denominated reserves by more than half. It has also announced plans to eliminate all dollar-denominated assets from its sovereign wealth fund.

Shifts in Trade Invoicing

The efforts to de-dollarize have been most intense in this area. China has been a key force behind this trend, especially after the onset of its trade war with the U.S. in 2018. In a major threat to petrodollar hegemony, China is currently negotiating with Saudi Arabia to settle oil trades in Chinese yuan. On a recent state visit to China, French President Macron announced yuan-denominated bilateral trade in shipbuilding and liquefied natural gas.

Russia has also been active in shifting away from the use of dollars in foreign trade. It has steadily reduced its share of dollar settlements from 80% to 50% in the last ten years. India has been paying for deeply discounted Russian oil with Indian rupees for several months. India has also announced bilateral arrangements with several countries like Malaysia and Tanzania to settle trades in rupees. And in an unusual development, Pakistan recently paid for cheap Russian oil in Chinese yuan.

A desire on the part of the BRICS bloc to further extend membership to Iran and Saudi Arabia later in 2023 is another sign of petrodollar diversification and divestment.

Alternate Payment Systems

The lifeblood of international finance is its payment system. The gold standard for international money and security transfers is the Society for Worldwide Interbank Financial Telecommunications (SWIFT). SWIFT does not actually move funds; it is instead a secure messaging system that allows banks to communicate quickly, efficiently and cheaply. China and Russia are now building international payment systems that can actually clear and settle cross-border transactions in their currencies.

These new trends will play a meaningful role in the eventual increased polarity of the currency world.

Reserve Currency Alternatives

We have already highlighted strong economic growth and institutional governance as important factors for ascendancy in global currency markets. The dollar has benefitted from those attributes among others for several decades now.

As the chatter on de-dollarization picks up, we take a quick look at how viable other currencies are to replace the dollar as the world’s reserve currency. We examine the current mix of global currency reserves to identify some candidates.

Figure 1 shows the composition of central bank reserves over time. Even with the steady decline in the dollar’s share this century, it is still almost three times as large as the second-largest currency in foreign exchange reserves.

Figure 1 - MI Q3

Source: International Monetary Fund (IMF) COFER. As of Q1 2023, share is % of allocated reserves

The euro is the second largest currency within global central bank reserves with a share of around 20%. The share of other currencies tapers off rapidly thereafter with the Japanese yen and the British pound at 5% apiece and the Chinese yuan at 3%.

The broad-based malaise in their local economies and markets work against both the U.K. and Japan. The U.K. is adrift and directionless post-Brexit, and the pound has been in a steady decline for many years. The Japanese economy has been in the doldrums for several years now. The Japanese stock market peaked more than 30 years ago, and the Japanese yen is heavily influenced by the Bank of Japan. We rule out the pound and the yen as viable alternatives to the dollar.

This leaves us with three potential alternatives for the next reserve currency of the world.

  • Euro
  • Chinese yuan
  • Basket of multiple currencies

We defer a discussion on central bank digital currencies to a later date based on their sheer nascence and lack of practicality. We also exclude monetary gold, which is not part of the foreign exchange reserves reported by the IMF.

Euro

The euro is the official currency of 20 out of the 27 members of the European Union. This currency union is commonly referred to as the Eurozone. The euro has a number of advantages that make it a viable contender for a more prominent role in the global currency market.

The Eurozone is one of the largest economic blocs in the world. It is also a major player in global trade. The euro is the second-largest currency today within each of the categories of global reserves, foreign exchange transactions and global debt outstanding. It is easily convertible and is supported by generally sound macroeconomic policies.

However, we highlight a couple of key disadvantages that may impede its rise to the status of the world’s reserve currency.

Fragmentation Risks – While the Eurozone has successfully maintained its currency union for more than 20 years, it still remains fragmented in a couple of key areas. The Eurozone does not have a common sovereign bond market and also lacks fiscal integration within the region. This heterogeneity disadvantages the euro in ways that simply do not affect the dollar; the stability of the dollar is reliant on one single central bank and one single central government.

We illustrate this with a simple example. The divergence in bond yields and national fiscal policies was at the heart of the Eurozone sovereign debt crisis around 2010. Several countries such as Greece, Portugal, Ireland and Spain were unable to repay or refinance their own government debt or help their own troubled banks. The bailout from other Eurozone countries required a level of fiscal austerity in terms of spending limits that proved politically challenging to implement. The euro came under considerable selling pressure at that time, which also saw a decline in its share of global foreign exchange reserves.

Lack of Political Diversification – The Eurozone is politically aligned with the U.S. on many geopolitical topics. Their unity came to the fore again during the imposition of Russian sanctions. If the main impetus to de-dollarize comes from the goal of political diversification in reserve holdings, the euro is not much of a substitute to the dollar in that regard.

Chinese Yuan

China has the second largest economy in the world and is invariably one of the top trading partners for many countries. In light of this, it may seem surprising that the yuan’s share of global trade invoicing is low at around 5%, and its share of global currency reserves is even smaller at around 3%.

While the Chinese yuan may aspire to play a bigger role in world currency markets, there are a number of hurdles that it may be unable or unwilling to overcome.

Lack of Convertibility and Liquidity – The Chinese yuan is not freely traded; it is pegged to the dollar and cannot be easily converted into other currencies or foreign assets.

Capital Controls – China imposes restrictions on the outflow of both capital and currency. It does so to limit the drawdown of its foreign exchange reserves and to keep the value of the yuan stable.

There has been a stark divergence between global and Chinese monetary policies in recent months. Global central banks have tightened aggressively to fight inflation; China has been reluctant to do so to protect its still-fragile, post-Covid recovery. This divergence in rates has exerted downward pressure on the yuan. China does not wish to deplete its foreign currency reserves by buying yuan. It also doesn’t want to see the yuan weaken further. Capital controls are the only way for it to achieve both goals.

Inherent Incompatibility – China enjoys a significant cost and competitive advantage in global markets through a relatively weak currency. The more it exports, the greater its incentive to limit currency appreciation. If the yuan succeeds in becoming the world’s reserve currency, the resulting demand for yuan will cause it to appreciate. In a perverse feedback loop, a stronger yuan will make China less competitive in global markets. This inherent incompatibility creates a strong disincentive for the yuan to overtake the dollar.

Basket of Currencies

It has also been proposed that a basket of currencies be designated to fulfill the role of a reserve currency. Any combination of currencies will have similar fragmentation risks to those listed above for the euro. In addition, hedging costs will be higher for a reserve currency basket because of asset-liability mismatches and liquidity differentials across constituent currencies.

A G-7 basket of currencies with high political solidarity will suffer from the same limitations in terms of lack of political diversification. On the other hand, a BRICS or any other Emerging Markets (EM) reserve currency basket will suffer from familiar issues of misalignment of common interests, lack of market depth, risk of political intervention and inherent incompatibility in balancing export competitiveness with currency strength.

We are, however, intrigued by the growing role of smaller currencies such as the Australian and Canadian dollars, the Swedish krona and the South Korean won within central bank reserves. In fact, these currencies account for more than two-thirds of the shift away from the U.S. dollar in recent years. We expect that their virtues of higher returns, lower volatility and fin-tech innovation will help them further increase their share in global reserves.

We come full circle and close out our discussion by highlighting the numerous advantages of the U.S. dollar in the global currency markets.

Fundamental Dollar Advantages

Even as its hegemony diminishes at the margin, we believe that the dollar will remain the world’s reserve currency for several decades. Our optimism is based on both the limitations of competing alternatives and the significant fundamental advantages of the dollar.

It is actually remarkable that the dollar has remained steady even in the face of lower demand from a declining share of foreign exchange reserves. We see this divergence in Figure 2.

Source: IMF COFER. As of Q1 2023, share is % of allocated reserves, dollar price is for DXY trade-weighted dollar

The green line in Figure 2 represents the price stability of the dollar even as its share of reserves fell from 1999 to 2022.

We turn to basic currency fundamentals to explain this steady historical performance and also to argue in favor of the dollar going forward. In the long term, currency performance is determined by differentials in inflation, economic growth, real income and productivity gains. The U.S. offers significant advantages on these and many other fronts.

  • Strong economic growth and incomes driven by sound macroeconomic policies
  • Low inflation from independent and credible monetary policy
  • Technological innovation that contributes to both productivity growth and disinflation
  • High domestic consumption which reduces reliance on trade and currency effects
  • Convertibility, stability and liquidity of the dollar
  • Deep and liquid bond market
  • Fundamental attractiveness of U.S. risk assets such as stocks, real estate and private investments
  • Well-regulated capital markets
  • Government and institutional adherence to the rule of law
  • Strong and credible military presence

We do not see a credible threat to the dollar’s status as the world’s reserve currency in the foreseeable future.

Summary

We expect dollar hegemony to be preserved, and only modestly diminished, over the next several years. The following trends summarize our outlook for the composition of central bank reserves and the currency markets overall.

a. The dollar’s share of world reserves will continue to decline gradually but still remain above 50%.

b. The share of the euro, Australian dollar, Canadian dollar, Swedish krona, Swiss franc and South Korean won will inch higher.

c. The share of the Chinese yuan and other BRICS / EM currencies will rise less than what is currently expected.

We chose to focus exclusively on the current dedollarization debate in this quarter’s publication. At the same time, we are well aware of the deeply divided views on inflation, recession and the stock and bond markets. We are also closely watching the progression of any credit crunch from the March banking crisis.

In the brief space here at the end, we will simply observe that we are more constructive on the economy and markets than the worst-case scenarios. Our pro-growth positioning in portfolios has paid off handsomely so far in 2023. We remain careful and vigilant during these uncertain times.

The main impetus for de-dollarization in recent months stems from a rise in geopolitical tensions. 

 

We expect dollar hegemony to be preserved, and only modestly diminished, for the next several years.

 

Our optimism is based on both the limitations of competing alternatives and the fundamental advantages of the dollar.

From Investments to Family Office to Trustee Services and more, we are your single-source solution.

An image of a silver and gold ring intertwined together.

Whittier Trust's Family Office has been named a Top 5 Finalist in the 2023-2024 STEP (Society of Trust and Estate Practitioners) Private Client Awards in the category of Multi-Family Office Team of the Year. This recognition serves as a testament to Whittier Trust's commitment to providing comprehensive wealth management solutions.

The STEP Private Client Awards celebrate the achievements and outstanding performance of firms and professionals worldwide. With a record number of entries, Whittier Trust's nomination as a finalist in the Multi-Family Office Team of the Year category further solidifies its position as a leader in delivering exceptional services to clients and highlights the expertise in serving multi-generational families with complex wealth management needs.

STEP AWARDS
Whittier Trust is dedicated to providing personalized and tailored wealth management services, and is proud to be recognized among the Multi-Family Office Team of the Year category. The nomination serves as a testament to the commitment, expertise, and client-centric approach exhibited by the Whittier Trust team in addressing the unique needs of multi-generational families.

"Our team at Whittier Trust is thrilled to be shortlisted for the STEP Private Client Awards, Multi-Family Office Team of the Year category," said David Dahl, CEO at Whittier Trust. "This recognition reflects our commitment to delivering exceptional service and innovative solutions to our clients."

As the oldest multi-family office headquartered on the West Coast, Whittier Trust continues to demonstrate the ability to provide comprehensive wealth management solutions to multi-generational families. The team of seasoned professionals ensure clients' financial goals are met while preserving the legacies for future generations.

The judging panel will decide upon a winner for each category and the honorees will be announced at the black-tie dinner and awards ceremony, hosted by Gyles Brandreth, on Thursday, Sept. 21 at the London Hilton on Park Lane.

Nielsen Fields 1 - Whittier Trust

Whittier Trust is pleased to announce the appointment of Nielsen Fields as Vice President and Portfolio Manager at its Newport Beach Office. Nielsen brings a wealth of experience and expertise in fundamental industry and company research, asset allocation, and portfolio management.

As Vice President and Portfolio Manager, Nielsen Fields will play a crucial role in Whittier Trust's commitment to delivering exceptional investment services to its valued clients. He will be responsible for conducting in-depth research across industries, selecting individual securities, and developing appropriate asset allocation ranges for client portfolios. Nielsen will also provide valuable guidance to clients on asset allocation strategies, risk assessment, and the importance of after-tax performance within their portfolios.

Prior to joining Whittier Trust, Nielsen served as a Portfolio Manager at First Foundation Advisors, where he managed a proprietary growth strategy and co-managed a core equity strategy. He was also an integral member of the Investment Committee, contributing to the development of asset allocations for client portfolios. Before his tenure at First Foundation, Nielsen gained valuable experience as an Analyst and Co-Portfolio Manager at Summit Global Management.

Nielsen Fields holds an MBA from Columbia Business School and a BS in Business Administration from Colorado State University. His commitment to professional excellence is evident through his CFA® charterholder status and active membership in the CFA Society of Orange County and the CFA Institute. These achievements reflect his dedication to staying at the forefront of investment management practices and his continuous pursuit of knowledge.

"We’re excited to welcome Nielsen to the Newport Beach office," said Caleb Silsby, Whittier Trust Executive Vice President and Chief Portfolio Manager. "His extensive experience and impressive skill set make him a valuable addition and underscores Whittier Trust's commitment to attracting top talent in the industry. As we aim to serve our clients locally, we’re confident Nielsen will be a great addition to our team."

Andrew Hall - Whittier Trust

The Whittier Trust Company of Nevada is excited to announce the hiring of Andrew Hall as a Vice President and Fiduciary Advisor in Whittier Trust’s Reno Office. With a strong background in trust and fiduciary experience, Andrew brings to the team a wealth of knowledge as well as a proven track record in advocating for clients and delivering tailored solutions.

As a Vice President and Fiduciary Advisor, Andrew collaborates closely with clients and their advisors to develop fiduciary and wealth strategies that are customized to meet the unique needs and goals of each individual or family. Andrew has a passion for helping clients achieve their financial objectives and has consistently demonstrated his ability to navigate complex situations and provide well-crafted solutions.

With over eight years of experience in the industry, Andrew's expertise has been honed serving large corporate trustees as a Trust Officer. During this time, he developed a deep understanding of the intricacies of trust and fiduciary services, further fueling his commitment to advocating for his clients and delivering exceptional results.

"We are delighted to welcome Andrew to the Whittier Trust team," said Dean Byrne, Whittier Trust Nevada Regional Manager, Senior Vice President and Senior Portfolio Manager at Whittier Trust. "His extensive experience and dedication to client success make him a valuable addition to our firm. Andrew's ability to tailor fiduciary and wealth strategies to meet the unique needs of our clients will undoubtedly contribute to their long-term financial well-being. We look forward to his contributions and continued growth within our organization."

Andrew holds a BBA in Trust and Wealth Management as well as an MBA from Campbell University. He is also a Certified Financial Planner™ (CFP™) and holds the prestigious Certified Trust and Financial Advisor (CTFA) designation, exemplifying his commitment to maintaining the highest professional standards. Beyond his professional achievements, Andrew is an avid traveler and outdoor enthusiast. When he is not at the office, he can often be found exploring new destinations, enjoying nature, hiking and baking.

Renken - Whittier Trust

Whittier Trust is proud to announce the elevation of Robert W. Renken to the role of Executive Vice President, General Counsel. He is now responsible for all legal affairs of the Whittier Trust Companies and their affiliated entities. 

Robert brings to this new role close to ten years of service with Whittier Trust as an Executive Vice President, Deputy General Counsel. He also brings over twenty years of experience in providing legal advice to closely held businesses and high net-worth individuals, focusing on business succession and estate planning, tax strategies, non-profit organizations and trust administration. 

Robert was previously a Shareholder of Clark & Trevithick in Los Angeles. Prior to that, he held the position of Senior Vice President, Trust Counsel with Fiduciary Trust International of California. Robert has been recognized as a Southern California Super Lawyer and is a frequent speaker on a variety of tax, trust, business and other related topics to professional groups and trade organizations.

“There’s nobody we’d rather have as our General Counsel than Bob. His reputation as a Super Lawyer is well deserved, and he makes us all better just with his presence here. It’s been a true privilege to work with him for the past decade, and I look forward to many more years to come,” states David Dahl, President and CEO of Whittier Trust. 

Robert Renken obtained his Juris Doctor from Loyola Law School, a Masters of Business Taxation from the University of Southern California and his Bachelor of Science degree from the University of the Pacific. He is a member of the California State Bar, a member of the Board of Directors for the Boy Scouts of America Greater Los Angeles Area Council and a member of the Rose Bowl Legacy Foundation.

A Bump in the Road?

2023 began on a positive note. Prospects of a resilient economy and moderating inflation raised hopes for a soft landing and propelled stocks higher. Consumer spending was robust and GDP growth seemed to be in line with levels seen in a normal economy.

But much like the experience of the last several months, investor sentiment continued to fluctuate between extremes of optimism and pessimism. An exceptionally strong jobs report for January re-ignited fears that the economy may be running too hot for the Fed to pause. Bond yields rose sharply in February and stocks sold off as investors expected the Fed to continue tightening.

As eventful as the bear market has been so far, one of its momentous milestones took place in early March. It has been long feared that the rapid pace of monetary tightening would eventually lead to a financial accident and a subsequent crisis. Those fears came true as two regional banks, Silicon Valley Bank (SVB) and Signature Bank (SB), collapsed on March 10 and 12, respectively.

Bank failures are rare and they are almost unheard of outside of recessions. SVB and SB became the two largest banks to fail since the Global Financial Crisis. Their demise was swift as they unraveled in just a few business days. Fears of contagion spread across the globe and eventually claimed Credit Suisse a week later on March 19 as it was bought by UBS with assistance from the Swiss government.

We examine the short and long term implications of recent developments in our analysis.

At this stage, the banking crisis appears to be more of a bump in the road rather than a crippling pothole or crater.

Background

Let’s take a look at the macroeconomic backdrop that led to this recent bank crisis.

The massive stimulus put in place to fight off the pandemic led to a significant growth in bank deposits and loans. The large regional banks were at the forefront of this surge in loan growth. While their share of the total U.S. loan book was less than 20% in 2019, they accounted for almost 40% of subsequent loan growth. Deposits also grew more rapidly in comparison to their normal pre-Covid levels.

This rapid increase in bank balance sheets came about in an era of easy money and abundant liquidity. As we all know now, those factors also caused a sharp spike in inflation and abruptly triggered the most rapid monetary tightening cycle ever.

Regional banks are less regulated than the systemically important large banks. Their governance oversight, risk management practices and capital resilience eventually proved inadequate to withstand the dramatic rise in interest rates and the unprecedented speed of a run on deposits.

Here is a look at how this banking crisis may be different from previous ones and some of its short and long term implications.

Comparisons to 2008

How does the current banking crisis compare to the Global Financial Crisis (GFC) in 2008? Will the events of March unleash a tidal wave of losses and bankruptcies and a deep global recession?

At this point, we do not believe that the current banking crisis will be nearly as severe or protracted as the GFC. Our optimism is based largely on the different origin of this crisis and the swift policy response that has limited its contagion so far.

Different Causes and Scope

Virtually all banking crises in the past can be traced to large loan losses stemming from bad credit. These losses typically arise from aggressive lending and poor underwriting. Borrowers turn out to be less creditworthy than believed and become progressively weaker as the crisis unfolds.

The transmission of a banking crisis into the broad economy follows a typical playbook. Loan losses diminish bank capital and inhibit the ability to lend in the future. The decline in loan growth then slows consumer spending and capital investments. The intensity and duration of this contagion eventually drives the depth of the ensuing recession.

However, the trigger for this banking crisis in March was not related to credit. It was instead a duration effect related to the rapid rise in interest rates. We know the basic bank business model is to borrow short and lend long. Bank deposits are short-term liabilities and bank loans are long-term assets. Bank balance sheets have an intrinsic duration mismatch where assets are more sensitive to interest rates than liabilities.

The rapid rise in interest rates triggered this duration risk and created unrealized losses in the long term bonds and loans within bank portfolios. The same rapid rise in rates also made money market funds at non-banks more attractive than bank deposits. Even as bank deposits were declining in a flight to money market funds, regional banks became vulnerable to another unusual risk.

Bank deposits are insured by the FDIC up to $250,000. Regional banks generally work more closely with small businesses. With a corporate clientele that typically maintains large balances, regional banks ended up with a high proportion of uninsured deposits in excess of $250,000.

Silicon Valley Bank catered predominantly to the venture capital community within its geographic reach. Given its client base, SVB ended up with one of the highest proportions of uninsured deposits among all banks at over 90%.

The decline of bank deposits at SVB was initially driven by the liquidity needs of its clientele as venture capital funding dried up. As SVB sold off assets and incurred losses to offset the initial decline in deposits, things quickly snowballed out of control as depositors feared for the safety of their remaining uninsured deposits.

In a brave new world of digital banking and social media, depositors pulled out a record $42 billion in deposits in one single day on March 9.

In an unprecedented bank run in terms of speed, SVB collapsed in two business days.

Unlike prior banking crises, this one was triggered by the unique confluence of a concentrated customer base in one single industry and geography, inadequate liquidity provisions and a lack of proactive regulatory oversight.

While a credit crunch may yet develop in the coming months, this banking crisis so far is different in that it has not seen large credit losses from defaults or bankruptcies. The SVB failure was not credit-driven, but rather a classic run on the bank created by a crisis of confidence and the ease of digital banking.

And finally, a quick word on the likely scope of this crisis in the coming months. This banking crisis is likely to be far less severe and systemic than the GFC because of one key difference – the health of the U.S. consumer.

The consumer, who drives 70% of the U.S. economy, is far more resilient today than was the case in 2008. The consumer balance sheet is healthy with no signs of excessive leverage. In a still-strong jobs market, consumer incomes are robust. While showing welcome signs of slowing down from an inflation point of view, consumer spending is still solid.

Timely Policy Response

The potential contagion from the failures of SVB and SB in one single weekend was controlled when the U.S. government announced that it would backstop all deposits at the two failed banks. In a similar vein, global contagion was contained the following weekend as the Swiss government intervened to prevent a potential chaotic failure of Credit Suisse.

The Fed also stepped up its liquidity provisions in the wake of the SVB and SB failures. The Fed’s Discount Window borrowing shot past $150 billion in the week ending March 15. The Fed also opened up a Bank Term Funding Program to offer loans of up to one year to depository institutions pledging qualified assets as collateral.

The Fed’s actions have caused its balance sheet to expand in recent weeks as shown in Figure 1.

Source: Federal Reserve

The Fed balance sheet grew to almost $9 trillion in 2022 and had fallen to a low of $8.3 trillion on March 8. The liquidity provisions to mitigate the March banking crisis saw its balance sheet grow again by more than $400 billion.

We believe that the Fed will further expand its balance sheet as needed to ward off a larger scale banking crisis. The additional liquidity will be aimed at stabilization as opposed to an intentional and stimulative increase of the money supply. These funds will help banks preserve or replenish bank capital. They are less likely to be deployed into the real economy in the form of new loans and add to the velocity of money through the multiplier effect.

Banks and Commercial Real Estate

One of the biggest concerns about the current banking situation is the refinancing of commercial real estate (CRE) debt in the near term. The fear of defaults and more bank losses is especially acute for the office segment as excess supply overwhelms lower demand in the new era of remote work.

We know that commercial real estate will be hampered by the higher cost of refinancing as rates have gone higher. We focus on the risks for the sector from the lack of availability of capital, not just the higher cost of capital.

Here are some salient details of the commercial real estate debt market.

  • Total commercial real estate debt is around $4.5 trillion
  • 38% of this debt is held by banks and thrifts
  • However, all commercial real estate debt makes up only 12% of total bank domestic loans

The commercial real estate debt coming due in the next 3 years is almost $1.5 trillion. The office debt maturing in the next 3 years is 12% of that amount or about $180 billion. We observe that both the low share of office debt as a % of total CRE debt and the low share of total CRE debt as a % of all bank loans may limit the impact of office debt defaults more than investors currently fear.

We also point to a more subtle positive observation in the composition of office loans maturing in 2023 and 2024. This is shown in Figure 2.

Source: RCA, Cushman & Wakefield Research

Each bar in Figure 2 breaks down office loans maturing in any given year by the original term loan.It tells us how many of the loans maturing in any year were originated recently (in the last 3 years) and how many loans are more seasoned (over 5 years old).

Let’s take a closer look at just the shaded box in Figure 2 above which highlights office loans maturing in 2023 and 2024. We can see here that most of these maturing loans are seasoned with an original loan term of 5 years or longer.

We believe the original term of loans maturing in the next two years is relevant for the following reason. From the time that these more seasoned loans were originated, the underlying properties had a greater chance to appreciate in value before the onset of higher interest rates. This accrued value appreciation will make refinancing easier even if bank lending standards tighten and loan-to-value ratios come down.

By the same token, the loans most at risk of default would be those that originated recently in the last 3 years. These properties have likely lost value both from non-performance and higher cap rates. On a positive note, they make up a smaller percentage of all office loans maturing in 2023 and 2024.

The cascading impact of the rise in interest rates so far will play out in the commercial real estate market over several months. A likely pause in the Fed tightening cycle will provide welcome relief for all segments of the real estate market.

At this point, we do not see a dire debt crisis stemming from commercial real estate.

Secular Implications

It is inevitable that the end of easy money and the banking crisis of 2023 will leave us with long-term shifts in bank regulations and business models. Here are some quick thoughts on secular changes in regulatory oversight, profitability and valuations.

It is quite likely that we will see greater regulation of regional banks with at least $100 billion in assets. The key lesson from SVB is how to incorporate unrealized losses in banks’ securities portfolios into regulatory capital.

It would also make sense to apply “enhanced prudential standards” to regional banks with assets of more than $100 billion. These standards will subject smaller banks to new stress tests and liquidity rules. We expect bank oversight and scrutiny will become more stringent to assess funding sources and concentration risks. Regulators may also act to deter a run on deposits with additional protection at a greater cost to the banking sector.

The greater burden of regulatory oversight and compliance is likely to bring down profitability and valuations for most financial institutions. The ones who can fundamentally restructure and organize their business models around specific customer needs may be able to avoid this adverse fate.

Economic Impact

Let’s take a step back to see how this micro banking crisis fits into the bigger macro picture for the economy and markets. In that context, it is helpful to recap the latest trends in inflation, jobs and overall growth.

Even as headline inflation continues to decline at a meaningful clip, core inflation has remained largely unchanged in recent months. Unlike the skeptics on this front, we expect shelter costs and wages to also decline gradually in the coming months.

Job growth has slowed down in recent months but still remains healthy with more than 200,000 new jobs created in March. Other metrics of economic activity continue to show a gradual deceleration. We see evidence of an orderly economic slowdown, but no signs of a precipitous and chaotic fall into a deep recession.

At the time of this writing, the contagion from the regional bank crisis in March to the broader U.S. economy seems to be contained. The recent bank failures will likely slow credit growth through tighter lending standards in the coming months. At the margin, this will further slow economic growth.

On the other hand, the “tightening” from slower loan growth will help the Fed pause sooner and pivot to rate cuts earlier than expected. We believe these two effects will offset one another and may well rule out significant changes in the economic outlook.

At this early stage, we do not expect the banking crisis to materially add to the depth of any impending recession.

Summary

The risks which triggered the recent bank failures were unusual and different than those seen in previous crises. We summarize our key takeaways and insights on the topic as follows.

  • The current bank crisis arose from duration and liquidity risks which were triggered by a historically rapid run on deposits, not from the more adverse risk of negative credit exposure.
  • Timely policy responses have so far contained the regional bank crisis without any material side effects.
  • We believe bank regulators and the Fed also have enough policy flexibility going forward to stave off a major systemic shock to the U.S. economy.
  • The disinflationary effects of slower loan growth may help the Fed pause and pivot sooner than expected.
  • We believe that any potential recession will likely remain short and shallow.

As uncertain as the last few years have been, the events from March add a new dimension of risk to the economic and market outlook. We are even more vigilant, careful and prudent in managing portfolios during these volatile times.

Timely policy responses have so far contained the regional bank crisis.

 

At this stage, the banking crisis appears to be more of a bump in the road rather than a crippling pothole or crater.

 

The disinflationary effects of slower loan growth may help the Fed pause and pivot sooner than expected.

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Whittier -Jerry Green

Whittier Trust is pleased to announce that Dr. Jerrold D. Green has joined the wealth management company's board of directors. Dr. Green is a renowned scholar and executive with extensive experience in global business and diplomacy.

As President and Chief Executive Officer of the Pacific Council on International Policy in Los Angeles, Dr. Green brings a wealth of knowledge and expertise to the Whittier Trust board. He is also a Research Professor at the University of Southern California’s Annenberg School for Communication and Journalism.

Prior to joining the Pacific Council, Dr. Green was a Partner at Best Associates, a privately held merchant banking firm with global operations, and occupied senior management positions at the RAND Corporation, where he was awarded the RAND Medal for Excellence. He is also a member of the Council on Foreign Relations, the Lincoln Club, the Advisory Board of the Center for Public Diplomacy at the University of Southern California and the Bill Richardson Center for Diplomacy/FBI Hostage Recovery Fusion Cell Influencers Group.

Dr. Green's distinguished career includes serving for eight years as a member of the United States Secretary of the Navy Advisory Panel, where he was awarded the Department of the Navy's Distinguished Civilian Service Award. He has also served on the U.S. Department of State Advisory Committee on International Economic Policy, the Board of Directors of the California Club, and the Board of Falcon Waterfree Technologies. Dr. Green also holds a B.A. (summa cum laude) from the University of Massachusetts/Boston, as well as an M.A. and Ph.D. in Political Science from the University of Chicago.

In addition to his academic and business achievements, Dr. Green has been recognized for his contributions to public service and the international trade community. He is a Reserve Deputy Sheriff with the Los Angeles Sheriff's Department and was accorded the department's Meritorious Service Award. In 2019, he was honored by the Los Angeles Area Chamber of Commerce with its World Trade Week Stanley T. Olafson Bronze Plaque Award, which recognizes “a member of the international trade community whose outstanding dedication, efforts and achievements have advanced trade in the Southern California region.”

"We are thrilled to welcome Dr. Green to the Whittier Trust board of directors," said Whittier Trust President and CEO, David A. Dahl. "His deep expertise in international affairs, public policy and business will be invaluable as we continue to grow and provide the highest level of service to our clients."

Whittier Trust announces the retirement of Paul Cantor after 13 years of extraordinary service and commitment as Executive Vice President, Client Advisor, and Northwest Regional manager.

Nickolaus Momyer, Senior Vice President and Senior Portfolio Manager with Whittier Trust, will assume the role of Northwest Regional Manager, Senior Vice President, Senior Portfolio Manager.

“Paul’s many years of service have been a gift to us here at Whittier Trust and to our clients. He has been a valuable part of our expansion in the Portland and Seattle markets and a huge reason the Northwest Office was named a Top Five Multifamily Office by the Society of Trust and Estate Practitioners in 2021. We are saddened to see him go and to lose his presence in the office, but we’re also so grateful for what he’s done for our clients.” — David Dahl, Whittier Trust President & CEO

In his new role, Nick Momyer will take over the leadership of Whittier Trust’s Northwest Region. The Seattle and Portland Offices are two of Whittier Trust’s many growing teams and client bases, reflecting a continued effort to connect with individuals and families locally. In his continuing role as a Senior Portfolio Manager, Nick is responsible for helping establish the investment philosophy of the firm. He’s also responsible for the selection of individual securities and appropriate asset allocation ranges for client portfolios.

“Nick Momyer was the clear choice to succeed Paul as Northwest Regional Manager. Nick has a long resume full of great experience behind him, and he’s done exceptional work in focusing on our clients and enhancing the Northwest Team. Nick is deeply embedded in the northwest area through his work as a board member with The Seattle Public Library Foundation and as a member of the Investment Committee at The Mountaineers. His commitment to the local community aligns with Whittier Trust’s vision to make a meaningful and lasting difference in the communities that we do business in,” said Dahl.

 

Whittier Trust pros share insights about why a career path in finance can be rewarding—and challenging

Pursuing a career as a finance professional, especially in investment wealth management, can be worthwhile and fulfilling. At Whittier Trust, advisors are the heartbeat of the company, making a career path in finance an opportunity to impact the lives of their clients in a positive way. What are the important skills to cultivate and the steps required for success in this field? Two of Whittier Trust’s client advisors weigh in with some things to consider. 

For a finance professional, even in a high-tech world, human competency still matters. 

Although technology has introduced new methods to manage finances, including online banking, web-based investing platforms and digital wallets, the expertise of a wealth advisor, accountant or financial analyst cannot be substituted by any application. That personal touch and tailored approach is evident at Whittier Trust, where the company maintains a low client to advisor ratio. “The personality traits and skills needed at Whittier include insight and analysis, problem solving, interpersonal skills, confidence, knowledge of digital tools, strategic and analytical skills, adaptability, honesty and strong values, strong leadership skills, industry-specific knowledge and more,” says Whittier Trust SVP and Senior Client Advisor Lauren M. Peterson. She adds that being adaptable and agile to accommodate clients’ varying needs is another lynchpin for success. 

Finding the best careers in finance: a well-rounded skill set primes advisors up for success. 

Cultivating that mix of hard and soft skills is one of the many keys to success for a financial professional. They must be able to evaluate the risks and opportunities of any financial decision and create a detailed plan to accomplish their goals. This includes staying current on industry and economic news, growing relationships with other professionals in the industry and knowing how to execute the agreed upon course of action. 

Finally—and importantly—they must communicate effectively while considering emotional factors that could be in play for a client, Peterson notes. “This career path as a financial professional would not be good for someone who is not numbers savvy, disciplined, able to think strategically and lacks interpersonal skills,” she says.

A client-first approach makes a difference. 

At Whittier Trust, no client request is too big or too small to garner attention from an advisor. “Whittier Trust encourages all employees to exhibit the entrepreneurial spirit that allows us to wear more than one hat within our role for serving clients,” explains Associate Client Advisor Thomas Porter. “That means finding innovative solutions for our clients while carefully considering all factors of a decision in a timely manner. It means being able to clearly communicate to clients or your colleagues, while also being an effective listener who can address and understand what is being communicated.” 

The industry continues to grow, making a career path in finance a bright one. 

Even in an uncertain economy, some industries are on the rise. According to predictions by the U.S. Bureau of Labor Statistics, opportunities in business and finance are expected to increase by 7% from 2021 to 2031, slightly surpassing the average anticipated growth rate for all occupations in the United States. Some of the best careers in finance made the U.S. News and World Report “100 Best Jobs” list in 2023. A financial manager, actuary, accountant and financial analyst all made the list. 

It’s good news, both for the clients who rely on savvy finance professionals and for those strategic thinkers who would choose this career path. “Working in finance becomes rewarding when you realize the impact you can have on others,” Porter says. “Using my background, I can help others make otherwise difficult decisions about their lives to minimize stress allowing for more time doing the things they enjoy with the people they love.”

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