Should I be worried about my bank?  Or the entire US Banking system?

The sudden collapse of Silicon Valley Bank created a lot of anxiety, and it’s quite natural to wonder if this is an isolated event, or something that will spread.  It’s a very fluid situation (actually, since we started writing this we’ve learned of another bank failure and the FDIC’s decision to insure that ALL of SVB’s and Signature Bank’s deposits will be paid… including those over the $250k insured limit) so things can change quickly.  So should you be worried?

We think the banking system is still quite healthy.  The largest banks are subject to significantly more stringent liquidity requirements than smaller regional banks and the Federal Reserve has levers they can pull to help the banking system if needed.

We also think you shouldn’t worry about your bank IF your assets are fully protected by the FDIC. 

Is there anything I should do now?

We hope the government’s intervention in guaranteeing all the deposits of Silicon Valley Bank will lower the anxiety level and help prevent any more runs on banks.  We still think people should strongly consider the following:

• Understand how your bank assets are covered by FDIC insurance and take steps to prevent having uninsured deposits. Please see the attached “FDIC Insurance” article for information on the insurance program and cash management strategies.
• Banks have done a relatively poor job of rewarding their depositors and are paying below-market rates of interest. Please reach out if you’d like to discuss where you might redeploy your bank assets.

What made Silicon Valley Bank unique?

Silicon Valley Bank was hit with the perfect storm of events, and its collapse was quite unusual because it wasn’t caused by bad debts (defaults) like most previous bank failures.

The key unique factors that led to the failure include:

• Large Uninsured Deposits
  • Most of the deposits were large, corporate accounts… specifically of start-up companies who have volatile cash management needs
• Undiversified Customer Base
  • SVB was a niche bank that catered to the tech and start-up worlds. As the tech economy has slowed, the bank’s customers started withdrawing funds to pay for business operations, which led to a continuing drop in deposits.
  • Once news came out that the bank needed some help in meeting deposits, big names in the tech and start-up ecosystem began advising businesses to withdraw their funds (which were at risk because they weren’t insured) and a classic bank run occurred.
• Large Losses on Treasury Bonds
  • This is the biggest issue that doomed SVB. The bank did a very poor job of managing the risk of their portfolio.
  • Even though the bank invested in Treasuries that are considered Risk Free, the bank suffered large losses on their bond holdings when interest rates jumped up so much in 2022. The bank was forced to sell their Treasuries at losses to meet customer withdrawals, and these losses basically wiped out the bank’s capital.
  • The bank had very short term liabilities (the customer’s deposits) but invested them in longer term securities that declined in value.

In Summary…

These recent bank failures have given us a reminder of two important things… banks can indeed collapse, and FDIC insurance is a critical piece of our banking system.

Please make sure your bank assets are FDIC insured and reach out to us if you’d like to discuss ways to improve your cash management situation.