Silicon Valley Bank Collapse: What You Need to Know

We’re sure you’ve heard the news over the last week regarding the failure of Silicon Valley Bank. Here is a brief recap of what is going on, and our thoughts on how you should consider this within your own Financial Life Plan. 

Rest assured: there is no need to panic. 

But this event does bring up some important and relevant planning topics. 

Read More: Should You Retire When The Stock Market Is Down?

What is Silicon Valley Bank, and what just happened?

In December 2022, Silicon Valley Bank (SVB) ranked as the 16th largest bank in the United States with assets of $209B. It’s important to remember that, even with a high-profile name and lots of tech companies and venture capital funds as clients, SVB was just a bank.

However, as of March 10th, SVB has been shut down by the CA Department of Financial Protection & Innovation, marking the largest bank failure since 2008 and the second-largest in history. 

Despite specializing in business banking for startups in the Tech/Biotech/Healthcare Sciences industries, SVB functioned like any traditional bank. They accepted client cash deposits, maintained required reserves, and either lent out funds or invested the excess. 

One of their significant investments included government bonds, which are typically considered low-risk, but proved disadvantageous as interest rates increased dramatically this last year.  

Alongside the bank, SVB's startup clientele faced greater difficulties in meeting their financial obligations due to the higher interest rates (aka borrowing costs). This, and a more reluctant venture capital environment, lead to lower client deposits at SVB. 

More specifically, they purchased $80B in government bonds (aka lent $80B to the U. S. Government) at 1.6%. Problem is, the same “no-risk” investments were now paying 5% by this time last week. So, on their books, this $80B must be carried at a discount. This spooked customers. And to make things worse, a well recognized venture capitalist investor recommended his clients move their cash out of SVB. Rumors spread quickly.

In response, to help with their cash liquidity, SVB chose to sell $21B worth of bonds at a loss of $1.8B.

The public took notice, and with the (ultimately correct) assumption that SVB’s liquidity issues were significant, depositors began pulling cash out which further exacerbated the crisis. On March 9th, the bank had $42B in attempted withdrawals.

Now the FDIC has taken over, and working with the Treasury and Federal Reserve, they made a remarkable announcement – beyond the standard $250,000 FDIC-insured deposits, they’ve also guaranteed the uninsured deposits (a whopping 93% of SVB’s deposits were above the $250,000 insurance level… which is likely unique to SVB and the clientele it served). In other words, all bank customers will be made whole.

This is where we find ourselves as of now, though there will likely be more news on this in the coming days.

Graphic from the WSJ:

What does this mean for you?

This situation brings to light a few takeaways worth learning from, and reviewing in your own planning.

1. Understand FDIC insurance, and how it applies to your bank accounts.

FDIC-insured banks cover up to $250,000 per depositor in covered accounts. (A much deeper dive is provided by the FDIC here).

If your Financial Life Plan recommends holding a large cash amount in the bank, you may consider “stacking” FDIC insurance (an example would be each spouse having an individual account + a joint account, allowing you to obtain $1,000,000 in combined coverage), OR you might consider having multiple checking or savings accounts at separate banks. 

As you’ve heard us say by now, holding too much idle cash can be harmful, so it’s a good opportunity to make sure your cash amounts are intentional and functioning as part of your overall Financial Life Plan.

Read More: Tips on Maximizing FDIC Insurance

2. Avoid backing yourself into a corner where you must sell an asset at a bad time. 

This is precisely what happened to SVB (if they had been able to hold their government bonds until maturity, we may not even be talking about this right now), and it is precisely why Triune uses a “Three Bucket Approach” to financial planning and investment management. 

If you think you’ll need money in the next 0-2 years (aka your “short-term bucket” for emergency fund, short-term goals, etc.), then that money should be in a stable, liquid “investment” – we often recommend a high-interest savings account with FDIC insurance and/or a CD (depending on your unique situation). 

Your mid-term and long-term buckets are where you have the time horizon needed for investments like bonds, stocks and real estate. If you need money in the near-term, you have no business investing it. 

Having a short-term need for cash and the volatility that comes with long-term investments is likely to spell disaster.

3. Should you be worried?

Although the news of the SVB closing can be concerning to some, it doesn't have to be a cause for alarm. While not a desirable outcome, the protocols to protect depositors are in place (and in this case, the Treasury and Fed going above and beyond the insured coverage). The bank's assets will be auctioned off to the highest bidder (almost certainly just a larger healthier bank, or multiple banks). 

It might feel intimidating when something like this happens, but it isn’t likely to significantly impact those who are not direct customers of SVB. Furthermore, the market is both cyclical and adaptive—it has a way of course-correcting itself, and this downturn is unlikely to have any lasting impact on a thoughtful, intentional Financial Life Plan and investment strategy.