Concerns Regarding Silicon Valley Bank
Silicon Valley Bank (SVB) has recently gone under, losing its funds and ability to stay afloat after devastating financial miscalculations and a subsequent run on the funds themselves.
How It Happened
SVB, a typically reliable and credible banking institution utilized primarily by tech companies and startups, began to invest their excess cash they had available into long-term US treasury bonds.
Unfortunately, interest rates then began to rapidly rise, reducing these bonds’ values in turn. SVB clients simultaneously saw downturns in their businesses and began pulling funds from their accounts in order to fund ongoing operations.
The bank was then forced to begin selling bonds at major losses to fund the ongoing withdrawals happening. Silicon Valley Financial Group, SVB’s parent company, then saw their stock dip by more than 50% on the morning of March 9th, leading to VC firms and tech companies pulling out their funds as quickly as they could.
As many accounts were larger than the Federal Deposit Insurance Corporation’s covered amount of up to $250,000 per account, panic-driven account liquidations led to an announcement of SVB’s insolvency by the end of the following week.
How Banking Insurance Works
The general rule that banks follow when it comes to holding funds in reserve for withdrawals is 10%. The rest is lent out, which accounts for the interest you gain on your savings accounts. The 10% rule has generally worked out for everyone, but when something like the SVB incident occurs, and people suddenly lose faith in the institution’s ability to realize their funds, a bank run can occur and failures can be imminent.
The bright side of this is that the FDIC insures up to $250,000 per account, which is covered by premiums paid by the bank to the FDIC while the institution is still functioning. In rare cases where several banking institutions, or the industry as a whole, begin to fail, the federal government will typically step in and ensure the FDIC can repay the owed amounts.
Other account types such as IRAs and trusts are subject to varying insured coverage by the FDIC, but the Electronic Deposit Insurance Estimator (EDIE) backed by the FDIC will inform you what these amounts are, if any.
Self-Acquired Financial Insurance
Beyond the FDIC, which does not cover all types of investment accounts, the Securities Investor Protection Corporation (SIPC) offers insurance that can cover up to $500,000 in losses due to a broker failure.
In most cases, maintaining funds at a reputable, established banking institution is safe and reliable, but looking over your accounts and making sure you know where you are covered and where you are liable for risk is always an important part of planning for your financial future. To schedule a complimentary financial review with Moore’s Wealth Management, click here or call our office at 770-535-5000, where a staff-member is awaiting your call Monday through Friday, 9AM to 5PM.
Sources:
- The SVB Situation and Your Financial Picture
- https://www.forbes.com/advisor/banking/is-my-money-safe-in-the-bank/
- https://www.wsj.com/articles/silicon-valley-bank-svb-financial-what-is-happening-299e9b65
- https://www.theverge.com/23635692/silicon-valley-bank-svb-collapse-explainer-startups-venture-capital
- https://hermoney.com/banking-2/what-happened-at-silicon-valley-bank-in-plain-english/
- https://www.cnbc.com/2023/03/12/stock-market-futures-open-to-close-news.html
- https://www.bloomberg.com/news/articles/2023-03-10/what-is-happening-to-svb-bank-run-fear-spreads-as-stock-tumbles
- https://www.cnbc.com/2023/03/10/silicon-valley-bank-collapse-how-it-happened.html
- https://www.cnn.com/2023/03/10/investing/svb-bank/index.html
- https://larrykotlikoff.substack.com/p/why-svbs-failure-is-really-scary
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