In 2008, the feds shut down Washington Mutual bank and handed its assets over to J.P. Morgan Chase. The bank’s total assets exceeded $300 billion. It was the largest bank failure in American history. Now in 2023, another U.S. bank just failed, and it’s a doozy.
Federal and state regulators shut down Silicon Valley Bank on Friday, March 10. The FDIC (Federal Deposit Insurance Corporation) set up a receiver to hold customers’ deposits in order to protect their money from SVB’s demise.
FDIC stated in its press release:
Silicon Valley Bank had 17 branches in California and Massachusetts. The main office and all branches of Silicon Valley Bank will reopen on Monday, March 13, 2023. The DINB [Deposit Insurance National Bank of Santa Clara] will maintain Silicon Valley Bank’s normal business hours. Banking activities will resume no later than Monday, March 13, including on-line banking and other services. Silicon Valley Bank’s official checks will continue to clear.
At the end of 2022, SVB held over $200 billion in assets. About $175 billion were customer deposits.
Why Did this Bank Failure Happen?
Earlier this week, SVB announced it was seeking additional capital of nearly $2 billion. It just experienced nearly that amount in asset losses.
SVB was heavy in bonds. When the bank bought these bonds, the interest rates were very low. But as interest rates rose, this began to be a significant problem for SVB, since the bank’s returns were far below what they could have been otherwise. (Bond yield is tied to interest rates).
SVB sold nearly $21 billion of assets to get rid of these lower interest bonds and get their returns up. The bank took a loss of nearly $1.8 billion on those sales.
Depositors began to be concerned about their money and began to withdraw it at a rapid rate. This situation, known as a bank run, was common during the Great Depression. These types of events led to the creation of the FDIC in 1933.
As a result, the value of the parent company’s shares dropped nearly 60%. In order to prevent complete collapse, the state stepped in and stopped operations, turning them over to the FDIC.
Many venture-backed companies used SVB for banking. These companies already started experiencing more financial pressure due to a variety of economic factors, such as the Federal Reserve drastically raising interest rates.
What it really looks like is that the bank was skinny dipping when the tide went out.
What Happens Next?
California state regulators named the FDIC as the receiver for customers’ insured funds. FDIC, in turn, created Deposit Insurance National Bank of Santa Clara (DINB) to hold those funds.
Individual depositors have FDIC insurance up to $250,000 per insured institution. A single person is covered up to $250,000 at SVB, while a married couple with joint accounts received up to $500,000 in coverage.
The FDIC said that customers should be able to access their money no later than Monday the 13th.
As of now, Wall Street analysts don’t believe this bank failure will cascade to other financial institutions. (Let’s wait and see…).
The markets reacted negatively to this news (unsurprisingly). The Dow Jones Industrial Average and S&P 500 experienced significant drops shortly after the news broke.
What We Can Do to Protect Our Money
One of the acts I strongly advise everyone do is get out of consumer debt as quickly as possible. This will increase your financial resiliency and help you avoid making payments that are someone else’s passive income.
In terms of protecting your money from a bank failure, that’s a bit more complicated.
One step you can take is to have a secondary account at another bank that you can access if needed. It doesn’t have to be a large bank, perhaps just a credit union or regional bank.
If you have your fully-funded emergency fund in place, you could keep a few thousand dollars in that account accessible if your bank experienced this type of failure.
You may also want to consider having some cash on hand as well. Keep some in your wallet, but the rest I would recommend putting into a fireproof safe.
And regarding your investments, don’t fret about drops in the market today. The long-term is truly what matters. If anything, you can use today as a means of getting funds while they are on sale, if you’re in such a position.
Final Thoughts on the SVB Bank Failure
Things like a bank failure we cannot control. All that really is in our hands is how we prepare for such events and how we respond to them. And those two things are a huge part of the battle.
My best advice on this bank failure is to handle your own financial household well each and every day. If you are concerned about your current bank’s health or practices, perhaps it’s time for a switch.
That may especially be so if you’re with Wells Fargo.
Most importantly, don’t panic. We never make good decisions when we are afraid, angry, or drunk. Facts are your friends. Let objective facts ground you to reality and prevent the catastrophizing from happening.