What You Need to Know About Silicon Valley Bank Failure

This week, over 50 banks had a halt in their trading, mostly regional banks. Many clients have reached out, asking if it is safe to have their money into Charles Schwab funds. Although it is not technically a bank, Charles Schwab got sucked into the fray because of its financial services industry. 

These questions came from fear of the news about two banks that were closed. The two closed banks however are in different industries from our clientele. The most well-known of the two was the Silicon Valley Bank (SVB), which was the 16th largest bank in the United States with over $175 billion in assets. This is the second-largest bank failure in U.S. history. 

What Go Them to This Point?

There were practices done by SVB that led the bank to failure. The main reason is, its clientele was fairly concentrated in the technology industry and the venture capital industry. Both are very important sectors in the U.S. economy. So they had very unique services offered to two very specific industries.

In short, what happened to SVB was that a few years back, as they were growing at almost an exponential rate, they did what banks often do, which is they buy long-term treasury securities, with the money from interest received they paid their customers’ interests on their deposits and funds operations.

At the beginning of 2022 however, the FED announced that interest rates would begin to rise as an attempt to control inflation. Given there’s an inverse relationship between bond prices and interest rates, as interest rates began to rise throughout 2022 and now into 2023, the value of those bonds that were held as collateral and as assets began to fall. As clients began to withdraw their money, the bank had to sell these assets to provide the cash liquidity needed for the withdrawals. Once that began to happen, they became aware of losses in their capital structure. The word got out most in the technology and venture capital world, and many started withdrawing money. On March 9th alone, $42 billion was withdrawn from the bank. 

It is interesting how part of it started on Twitter, which basically created a traditional run on the bank. Similar to the 1920s, except this time caused by social media. 

The Role of Regulations in the Banking Industry

The good news is that regulators stepped in and announced they are going to make all the depositors whole. Even those depositors who had deposits in excess of the FDIC amounts. However, shareholders and bondholders will not be made whole.

The FDIC insures depositors up to $250,000 per depositor per entity, account type per bank. So, individuals can have an individual account insured up to $250,000. If you and a spouse each have $250,000 in an individual account, you’re both insured. As a consequence of difficult times in the banking industry, the US Treasury has stepped in with a new program to allow other banks to borrow money for up to one year, utilizing the full par value of the assets that they currently own in order to secure their bank depositors so that they don’t have to liquidate assets. This is a brand new program created to generate additional confidence in the system since the banking system is all about confidence and trust. 

What About The Second Bank?

The other bank is the Signature Bank, which had a fairly niche clientele as well. They focused on law firms and crypto firms. Therefore,  diversifying your revenue stream and your clientele base as much as possible in any industry promotes increased financial “safety” in case any particular portion of the economy does worse than others.

What Does the Bank Crisis Mean to Our Clients?

Looking at our clients and their choices for banking, for instance, credit unions, Wells Fargo, Truist, etc. Do we have any reason at this time to believe that this could spread to where there’s a run on those types of banks? The answer is no. From news reports and that’s happening, like the government providing backstops, they’re calling them for depositors and as well for banks to borrow from this new program, it doesn’t appear that they’re spreading over into other areas.

Should We Worry About This Situation?

The pandemic had a lot financial implications on our country specifically, for example all the stimulus checks given to the population. As a consequence, there’s still a tremendous amount of excess cash in the monetary system. We’re probably going to see additional stresses in the economy as we transition. Unfortunately, we can anticipate additional volatility in the markets, until we reach calmer waters. 

Nonetheless, as far as common people go (those who are not venture capitalists, or running technology firms) the most they should do is understand what is going on. However, there’s no reason to be adding fear to our daily lives over this, at the moment.

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Casey Smith
President, Wiser Wealth Management

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