I wanted to contact you regarding the failure on Friday of Silicon Valley Bank. Many people are understandably concerned. Below is a short Q&A with some recommendations:
What happened? In the middle of last week, two pieces of news were revealed about Silicon Valley Bank (SVB), a midsize bank based in California: First, the credit rating agency Moody’s downgraded SVB’s rating, though only modestly. At the same time, however, the bank announced plans to issue stock to bolster capital. That additional capital was needed primarily because the bank—like many investors over the past year—had experienced a loss on its bond portfolio. It was also facing stress because the tech industry, which makes up a large part of its customer base, has been under pressure since last year.
Neither piece of news, on its own, would have been alarming. But in combination, many investors became spooked. And because SVB’s client base is concentrated among venture capital-backed firms, this fear spread more quickly than it otherwise might have. Many VC firms apparently advised their portfolio companies to move cash holdings out of SVB. This caused a run on the bank, the phenomenon that occurs when too many clients line up to withdraw their funds at the same time.
Because all banks, not just SVB, maintain only a fraction of depositors’ cash on hand—with the rest used to make loans—banks are vulnerable to this sort of chain reaction, and it becomes a self-fulfilling prophecy. And unfortunately, once a bank run begins, the rational thing for other consumers is to also want to pull their funds out, even though that compounds the problem. As a result, on Friday, the FDIC shut down Silicon Valley Bank and took it over.
What happens next? The concern for SVB customers is that the FDIC insures bank deposits only up to a limit—generally $250,000 per depositor per bank. Accounts held jointly with a spouse are covered up to $500,000. Amounts above those limits would be exposed to loss if it’s ultimately determined that the bank’s total assets are short of its total liabilities. For more detail on these limits, see the FDIC website.
Is the risk limited to Silicon Valley Bank? Unfortunately, when something surprising like this happens, people immediately look around and ask whether the same thing could happen elsewhere. For that reason, many consumers and investors are now looking at other small and midsize banks. Most observers agree that SVB’s issues were specific to that bank, but as noted above, the key risk is that a perceived risk can turn into a real risk if a bank run gets started. If consumers become concerned about a particular bank and begin withdrawing funds, then an otherwise healthy bank might end up experiencing a shortfall.
How worried should I be? While the stock market certainly is not all-knowing, the performance of bank stocks on Friday provides an indication of how investors are assessing the relative risks. There is greatest concern about banks that most resemble SVB, especially those with a similar concentration of customers in the venture-backed startup community. This includes, most notably, First Republic Bank, which saw its stock fall 15% on Friday. There is little concern about banks that are well diversified and far away from Silicon Valley. And because there is the view that consumers will move in the direction of safety, stocks of big banks, led by JP Morgan Chase, rose on Friday.
What should I do? Unless you have an account at SVB, which I don’t believe you do, or at First Republic, I wouldn’t panic. But if you have cash balances that are appreciably above the applicable FDIC limit at any bank, it’s worth taking time to reassess.
Right now, it’s anyone’s guess what will happen Monday morning. There is certainly the risk that fear could spread among customers of small banks. If they begin shifting cash out of smaller banks, this could trigger problems at banks that currently don’t have any problem at all. But it’s also possible that the government steps in somehow to contain the situation and limit the spread of fear. I’m sure this is what they’re discussing in Washington right now. In the meantime, if you have balances that exceed the FDIC limit at any one bank, these are the steps I recommend:
- If you’re familiar with the “prisoner’s dilemma” concept, this is unfortunately the situation we’re all in. What’s best for the overall system is for everyone to leave their money right where it is. That will help all banks avoid the self-fulfilling prophecy described above. At the same time, each of us also wants to protect our own financial security. For that reason, if you have balances over the FDIC limit at any one bank, the easiest thing would be to shift some of those balances to another bank or banks. Again, I wouldn’t panic, but if this is something you can do easily, I would.
- If you don’t have another bank account, you could open one easily at one of the online banks, including Ally, Barclays, Capital One, CIT or Synchrony. (I view all these as comparable and have listed them in alphabetical order.)
- If you don’t have another bank account and prefer not to open another one, you can move cash into your brokerage account at Schwab or Fidelity. I can then invest those funds in a money market fund backed by US Treasury bills. These balances are backed by the same entity that backs the FDIC—the federal government—but without any limit.
- Longer term, if you generally maintain balances above FDIC limits, an option to consider is the IntraFI Network (formerly known as the Promontory Network). This organization offers a unique service to provide full FDIC coverage on virtually unlimited balances. IntraFI accomplishes this by splitting customer balances among a number of banks, with no single balance exceeding the FDIC limit.
- Please reach out directly with questions or concerns or to discuss what solutions might be the right fit for you.
A truism of personal finance is that, unfortunately, there’s always something to worry about. During the depths of the pandemic, it was municipal bonds. Earlier this year, there was heightened concern about US Treasury bonds, owing to a potential debt ceiling debate which could result in another government shutdown. Today’s concern, of course, is banks. For that reason, the simplest rule in personal finance is the one that’s always most important: diversify. The silver lining of these periodic scares is that they serve as a reminder to check and double check a portfolio’s diversification. I am, of course, happy to review this topic with you at any time.