Silicon Valley Bank: Critical Lessons for the Everyday Investor
By now you’ve probably seen the headlines, heard the worried speculation, and maybe even had some questions about your own investment choices in the wake of the collapse of Silicon Valley Bank.
We’re here to help. We’ll walk you through an overview of what led to the newsworthy fall of the bank itself, what every investor can learn from the event, and what steps you can take to alleviate any nervousness you’re feeling.
What Happened to Silicon Valley Bank?
Silicon Valley Bank was the 16th largest bank in the United States and, according to Investopedia, was the largest bank to close its doors since Washington Mutual in 2008. SVB was ordered to shut down by the California Department of Financial Protection and Innovation — a state financial regulatory agency responsible for overseeing financial service providers, products, and innovation in the interest of protecting consumers — after a series of downward trends caused the bank to suffer severe losses that would ultimately lead to them being incapable of securing and delivering on customers’ assets and investments.
Between 2019 and 2022, Silicon Valley Bank saw record growth in assets and was of particular interest to customers in the technology industry. SVB, as is common with banks, kept some cash reserves from customer deposits so that they’d have cash on hand for standard levels of customer withdrawal activity, while investing the largest portion of these funds into securities in order to benefit from the interest those securities had the potential to pay. This practice allows banks to essentially invest with their customers’ funds and (hopefully) net a profit, some of which often gets passed on to customers in the form of interest on their accounts.
This sounds scary, but it is not usually an issue, as funds deposited into FDIC-insured bank accounts are covered up to a certain amount to protect against passing banks’ investment risks onto customers. This is why it’s so important to utilize financial institutions that are covered by the FDIC.
Unfortunately, in the case of Silicon Valley Bank, the bank chose to put all of its investment “eggs” into what ended up basically being one big, not-easily-accessible basket — treasury bonds and other long-term securities that are meant to be held for a longer duration in hopes of seeing profits. The recent sharp rise of inflation and subsequent hiking of interest rates caused many SVB customers to withdraw their funds due to panic or necessity, which resulted in SVB having to cash in these investments long before they were profitable so they could honor customer withdrawals. At the same time, the value of the bonds SVB had purchased was plummeting because newer, higher-interest bonds were more attractive to investors, causing those purchased by SVB to be less valuable.
The short version: inflation caused Silicon Valley Bank’s customers to withdraw large sums of money in excess of the bank’s cash reserves. This meant that SVB had to cash in what would normally have been relatively low-risk bonds to get cash to give to their customers. Inflation had caused these bonds to fall dramatically in value, so SVB netted a big enough loss that it not only had to close its doors, but the bank also couldn’t make many of its customers whole.
What Happened to Silicon Valley Bank’s Customers?
Because SVB was FDIC insured, customers were covered for up to a certain amount of their deposited assets.
FDIC deposit insurance protects bank customers in the event that an FDIC-insured depository institution fails. Bank customers don’t need to purchase deposit insurance; it is automatic for any deposit account opened at an FDIC-insured bank. Deposits are insured up to at least $250,000 per depositor, per FDIC-insured bank. (FDIC.gov)
Unfortunately, many SVB customers had more than $250,000 deposited, which without other help or insurance would typically mean that customers would lose any funds above that amount.
Thanks to the Federal Reserve, though, a rare exception has been granted that will allow all depositors to be fully covered for monies lost. This exception was made in an effort to try to avoid additional panic and what Investopedia refers to as “contagion” — a potential negative impact on the economy as a whole.
Unfortunately, investors in the bank (such as shareholders) are not covered under FDIC or the Fed’s exception, so they may be out of luck.
What We Can Learn from the Silicon Valley Bank Collapse
Put simply, investors should always be reasonable and cautious about their investment and deposit choices, but the unfortunate fall of Silicon Valley Bank shouldn’t necessarily cause additional anxiety. SVB’s investment choices were very limiting, in that they made depositors’ money very difficult to access in unexpected times of need. Without the sudden series of inflation-related events, this may never have been an issue, but because SVB didn’t appear to have a feasible plan for unexpected events, its losses were crippling.
So what does this mean for the everyday investor, business owner, or bank customer? There are actually a number of things you can do right now to ensure your money is deposited and invested wisely.
1. Don’t Put All of Your Eggs in One Basket
This advice is incredibly common for a reason — it’s not usually a good idea to hope that one specific angle will work out exactly as planned. Life is full of unexpected occurrences!
In the context of money, Time Horizon and Liquidity Needs are important considerations. Essentially, when planning what to do with your money, you should always have in mind how long it will be before you need to have access to it.
Need it soon? You’ll need to save or invest it in a way that allows you quick or immediate access when you need funds. Have a few years before you need this money? You can consider options that suit your needs where availability is concerned. In fact, at EViE Financial we typically recommend splitting your money between a variety of investments and accounts separated based on goals and needs. We call it a “multi-bucket” strategy, and those “buckets” are designed to suit your needs and goals, and to help cover you in the event of something unexpected.
This is one example of where SVB went wrong — they put the majority of their available assets into long-term investments without much diversification. This led to significant losses when they had to prematurely sell those investments when their financial situation changed.
2. Choose FDIC and NCUA Insured Banking Institutions
Banks and credit unions covered by FDIC and/or NCUA insurance can give you peace of mind, as your deposits will be covered in most cases up to $250,000, with certain additional coverage possible according to account type. If you aren’t sure if this coverage is in place at your financial institution, don’t be afraid to ask. A quick search on a financial institution is an easy way to check if they are members of FDIC or NCUA.
3. Don’t Panic!
It’s important not to let worry or anxiety make decisions for you, and not to let short-term events impact your long-term goals. The best place to start is by taking stock of your money and how it’s currently allocated, and then making any necessary adjustments from there. Start with the basics of budgeting and financial responsibility, make sure your savings and investments are being managed according to what makes the most sense for your needs, and get expert advice if needed.
Need assistance? Reach out to us! We’d be happy to help.
The Bottom Line on the Silicon Valley Bank Situation
Silicon Valley Bank enjoyed a quick rise to the position of 16th largest bank in the United States, but unfortunately, the bank’s fall was even faster. Because of investment decisions that didn’t allow for the unexpected rush of customers withdrawing their funds in response to inflation and higher interest rates, the bank suffered catastrophic losses that led to its shutdown.
SVB’s failure to plan for the unexpected can be seen as an important cautionary tale to any saver, investor, or business owner. Don’t panic, but do revisit your financial decisions to make sure they’re serving you, and that you’re covered in case of emergency!
Need help assessing your current financial picture and making sure you’re on the right path to reach your goals? Let’s chat!
Title photo by Mariia Shalabaieva on Unsplash