Silicon Valley Bank's Collapse and What's Next?

“Is my money safe?”

Perhaps it’s a question you’ve been asking yourself over the past few days. Certainly, quite a few of our clients have been, and we understand the concern.

Late last week, Silicon Valley Bank (SVB), the 16th largest bank in the U.S., faced a classic “Run on the Bank” and had to shudder its doors. The FDIC took the bank into receivership over the weekend. This followed the failure of Silvergate Bank (largely known as the “bank for cryptocurrencies”) and was just ahead of the failure of Signature Bank of New York, which began its liquidation process on Sunday.

Bank failures start to bring back memories of the Great Financial Crisis and the talk of an impending recession gets very loud.

Let’s talk about what happened and try to understand the implications of what could happen next in these next few paragraphs.

What Happened and, more importantly, what didn’t happen

Bank runs, in a classical sense, happen when the bank’s depositors (read: clients) all make a synchronized decision to start pulling their money out of their accounts at the same time.

Banks earn their money in the form of an interest rate spread, the difference between what they pay to borrow money from you and how much they make for lending it back to you. Normal business operations for a bank include borrowing your money in the form of deposits, paying very low interest or no interest at all for this source of funding, and then turning around and lending it back to you in the form of credit cards, mortgages, car loans, etc.

SVB was not ordinary. They had a collection of clients that were predominantly technology start-ups, their founders, and their employees. They took in a lot of deposits from this narrow sector and didn’t make a lot of loans. Instead, in order to earn money on those deposits, they went out and invested that money in government bonds and mortgage-backed securities.

Those investments did very, very poorly over the last 18 months, and the value of their investment portfolio went down (interest rates go up, bond values go down). At the same time, the tech sector was also experiencing a cash squeeze as their businesses were doing poorly during that same time period. SVB got caught in a perfect storm with their assets going down in value and their primary source of funding starting to remove their cash from the bank simultaneously. They became insolvent earlier this year, meaning they didn’t have enough cash to cover their losses. Then several influential venture capitalists, most notably Peter Thiel, knew the bank was in trouble and started telling their clients (the same clients that use SVB as their bank) to remove their cash as quickly as possible. It took about 36 hours for $42 Billion to be withdrawn from the bank and for SVB to collapse.

What happened is that SVB failed because they lost the most precious resource that they use to fund their operations - their depositors. SVB was not experiencing losses on the asset side of their balance sheets from underperforming loans (defaults), they were experiencing losses from some poor performing investments in bonds. That, in itself, makes this situation very different from the Great Financial Crisis and less likely to cause a contagion.

FDIC Insurance

The FDIC is a government agency that regulates banks and provides protection to its customers. If you want to do a deep dive, please click here for facts about the FDIC and bank failures.

The TL/DR is simply that there is protection for U.S. consumers that use the banking system. The FDIC will cover up to $250k of your deposits should your bank fail.

“No depositor has ever lost a penny of insured deposits since the FDIC was created in 1933.” ~Proudly posted on the FDIC website

Yesterday, the FDIC made the decision to backstop all the depositors at the failed banks, even above the FDIC insurance limit. The biggest concern about SVB’s failure was that the bank’s customers would not be able to access their cash, and that fear has been alleviated.

If you have a loan or mortgage at a bank that fails, those loans (considered assets) are sold off during the liquidation process to a new bank. All of the terms and covenants of your loan (including the interest rate) will be enforced and honored by the new institution and cannot legally be changed. You will still be required to make your payments as you wait for this transition to occur.

What about my investment accounts?

As the chaos began to unravel over the weekend, many started to worry about who would be next. Obvious candidates included other medium-sized, regional banks that served wealthy individuals in and around the Bay Area. First Republic Bank, PacWest, and Charles Schwab’s bank were immediately put in the crosshairs.

When Charles Schwab’s name gets mentioned, the fear moves beyond a client’s bank account balances and moves into their investment assets, including their retirement accounts.

Here are the two most important things you need to know in regard to your investment accounts, whether they’re held at Schwab or some other broker/dealer like TD Ameritrade (where Noble Wealth’s clients keep their assets). You have SIPC insurance coverage up to $500k (which protects your cash sweep balances and protects your assets from theft or fraud) and, maybe most importantly, your investments are held separately from the custodial bank’s assets. If any custodial bank or broker/dealer were to fail, your assets are held in separate accounts and would be acquired by a new firm in an auction.

If you’d like to read more, this is a great explainer piece from FINRA about what happens if a brokerage firm closes down.

(Note: SIPC insurance does not cover you if your investments go down in value)

“In virtually all cases, when a brokerage firm ceases to operate, customer assets are safe and typically are transferred in an orderly fashion to another registered brokerage firm. Multiple layers of protection safeguard investor assets. For example, registered brokerage firms must keep their customers' securities and cash segregated from their own so that, even if a firm fails, its customers' assets will be safe. Brokerage firms are also required to meet minimum net capital requirements to reduce the likelihood of insolvency, and to be members of the Securities Investor Protection Corp (SIPC), which protects customer securities accounts up to $500,000. SIPC protection comes into play in those rare cases of firm failure where customer assets are missing because of theft or fraud.” ~FINRA

What’s Next?

As of this writing, SVB and Signature Bank of New York had all of their deposits protected and backstopped by the FDIC, and the FDIC will continue the auction process to search for potential buyers of the assets. All customers have access to their cash.

We don’t have a crystal ball, but it’s reasonable to expect other banks to crop up around the country experiencing similar issues. The bond market, after all, just suffered it’s worst year since the great depression and many bond portfolios suffered pretty substantial losses in 2022.

Should you worry? We don’t think you should be worried.

“If a problem is fixable, if a situation is such that you can do something about it, then there is no need to worry. If it's not fixable, then there is no help in worrying. There is no benefit in worrying whatsoever.” - The Dalai Lama

If you bank with one of these other banks that are in the headlines today, you can make yourself feel better by moving your money to a large institution like Chase. You can also make sure that you keep your checking and savings account balances under $250k at any FDIC insured bank. But the likelihood of losing your money during a bank or brokerage failure is minimal at best, thanks to the FDIC and regulatory firms like FINRA.

As President Franklin Delano Roosevelt famously said back during the Great Depression:

“I can assure you that it is safer to keep your money in a reopened bank than under the mattress.” ~President Franklin Roosevelt in his first Fireside Chat, March 12, 1933