Silicon Valley Bank (SVB), which funded technology start-ups and venture capital firms, was acquired by the Federal Deposit Insurance Corporation (FDIC). (The FDIC is an independent agency of the U.S. government that protects customers of insured banks against losses of up to $250,000 per depositor in the event of insolvency of the insured bank.)
The SVB was the second-largest bank failure on record, leaving many to question the stability of other similar small and medium niche banks funding high-growth sectors such as technology and cryptocurrencies. I am throwing
The SVB story is still unfolding, but there are important lessons we can learn.
know where your deposit is
All bank consumers must keep their money with an FDIC-insured institution and keep personal account balances under $250,000. The FDIC provides separate insurance for different types of legal ownership (joint or trust accounts).
The FDIC states: “This means that a bank customer with multiple accounts could be insured in excess of $250,000 if the customer’s funds are deposited in different ownership categories and the requirements for each ownership category are met. It means that there is
If you are unsure whether various accounts are FDIC covered, please contact your bank for more information. Since the FDIC began operating in 1934, no depositor has lost a penny of his FDIC-insured deposits. Talk about peace of mind!
Reaching higher interest rates comes with more risk
With the technology sector booming on the back of low interest rates and abundant funding, many companies with SVB accounts were able to thrive and deposit large sums of money in banks.
SVB did what many banks do. It held sufficient cash on hand to meet withdrawal requests from depositors and used the “extra cash” to purchase US Treasuries. To increase the interest earned, SVB bought longer-term bonds. These bonds are often price sensitive to interest rate movements.
As interest rates rose, the SVB showed bond paper losses. Normally, that wouldn’t be a problem, but with tech companies and startups under pressure over the past 18 months, he’s had to withdraw his SVB deposits to fund operations. To meet the demands of these depositors, banks were forced to sell government bonds before maturity, freeing up funds at a loss. SVB’s management forgot the core concept of investing. In other words, higher yields can mean higher risk.
For many years, the Federal Reserve has maintained a zero percent interest rate policy (“ZIRP”). While interest rates that remain low for an extended period encourage growth, they can also lead to excessive risk-taking. With the Federal Reserve (Fed) changing course and raising interest rates to keep inflation in check, banks are forced to sell unprofitable and “safe” bonds to meet their obligations. I’m getting results that don’t work.
Bigger is better for banks
After the 2008 financial crisis, the government tightened its requirements for large banks. In addition, larger banks have a more diverse customer and funding base, which insulates them from such shocks.
Watered-down regulations could roll back
SVB is one of the small and medium-sized banks that lobbied the government to deregulate banks after the financial crisis. In 2018, those efforts bore fruit as the Trump administration eased regulation and oversight of banks with assets under his $250 billion. Perhaps more oversight and higher capital and liquidity requirements could have prevented SVB from this disastrous outcome.
CFP’s Jill Schlesinger is a business analyst for CBS News. She is a former options her trader and her CIO at investment advisory firm, and she is available for comments and questions at email@example.com. Check out her website at www.jillonmoney.com.
https://www.siliconvalley.com/2023/03/20/jill-on-money-lessons-from-silicon-valley-banks-failure/ Lessons learned from the failure of Silicon Valley Bank