Modern-Day “Bank Run”
If you have been following financial news headlines, last week Silicon Valley Bank, one of the 20 largest banks in the country, had a run on assets, causing it to become insolvent and taken over by bank regulators.
How did this happen and what does it mean to you? Let’s take a deeper dive which will hopefully answer some of your questions.
What Happened?
On Friday, March 10, Silicon Valley Bank, the bank to some of the biggest names in Big Tech, became the largest bank to fail since the financial crisis of 2008.
Silicon Valley Bank provided banking services to nearly half of the country’s venture capital-backed technology and life-science companies, according to its website, and to over 2,500 venture capital firms. Its swift, 48-hr collapse has sent shock waves through the tech industry, Wall Street, and Washington DC.
Silicon Valley Bank served a very niche client base of entrepreneurs. Flush with cash from start-up firms, it did what most banks do, kept small amounts in cash and invested the rest in long-term Treasury bonds. But as the Fed increased interest rates to fight inflation, the value of those bonds declined.
As long as you don’t need to sell those bonds prior to maturity while they are down, there is no problem. But when customers panicked and decided they wanted their money, the bank could not keep up with the requests and quickly became insolvent, forcing regulators to step in so that bank customers could access their funds and pay their bills. This is the new reality in the age of digital banking.
Silicon Valley Bank is Not Alone
It became quickly apparent, that given the unprecedented pace of Fed interest rate increases over the last year, Silicon Valley Bank was not the only community bank out there with large bond losses on its books. You may have heard that San Diego’s Silvergate Bank and New York’s Signature Bank, two banks with lots of crypto clients, were also taken over by regulators.
That is why the government stepped in over the weekend to support the U.S. banking system and protect the money of deposit holders. This is not a government “bailout” per se, but rather a backstop of protection for depositors until the banking system can shore up their financial positions.
It is pure speculation, but Goldman Sachs and others now believe that the Federal Reserve may pause increasing rates until conditions have stabilized. Fighting inflation is important, but not at the expense of blowing up the banking system.
What Does This Mean for You?
The good news is that the FDIC, the Treasury, and the Federal Reserve are all working together to protect you as a depositor. The banks and the greedy bank executives who made bad decisions, like not hedging their interest rate risk (like I did for my clients), and who looked out for themselves, cashing in their own stock, instead of looking out for their customers, will be held accountable. While the stocks of many banks were down considerably today, the market as a whole was up, and rest assured, your assets are safe.
Here is a link to the asset protections provided by your asset custodian, Charles Schwab. In addition to federal insurance limits of $500,000 on brokerage accounts and $250,000 on cash assets, Schwab has obtained additional insurance through Lloyds of London to secure client assets.
Disclosure
The opinions expressed above should not be construed as investment advice. This commentary is not tailored to specific investment objectives. Reliance on this information for the purpose of buying the securities to which this information relates may expose a person to significant risk. The information contained in this article is not intended to make any offer, inducement, invitation, or commitment to purchase, subscribe to, provide or sell any securities, service, or product or to provide any recommendations on which one should rely for financial, securities, investment or other advice or to take any decision. Readers are encouraged to seek individual advice from their personal, financial, legal, and other advisers before making any investment or financial decisions or purchasing any financial, securities, or investment-related service or product. Information provided, whether charts or any other statements regarding the market, real estate, or other financial information, is obtained from sources, which we and our suppliers believe are reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future performance.
