If you’ve tuned into any finance news lately, you’d be hard-pressed to find anyone who isn’t talking about the state of the banking industry. The big buzzwords on everyone’s mind?
Silicon Valley Bank.
There is no event quite like the recent cash withdrawals seen from Silicon Valley Bank customers — an excess of $42 Billion — at the speed seen in March of 2023.
Let’s break down what happened, and why there should still be optimism for the state of the banking industry in America.
What Happened at Silicon Valley Bank?
Silicon Valley Bank was a California-based commercial bank that mainly offered financial services to the big-ticket tech industry. First operating in 1989, it had grown into the preferred banking resource for venture capitalists and well-funded tech companies.
At the start of 2022, reports came in of questionable risk management practices by Silicon Valley Bank. By year’s end, it was reported that SVB had unrealized losses of over $15 Billion.
With rate hikes in tow during the recent inflation surge, Silicon Valley Bank experienced something that’s never happened before in a similar capacity: a bank run depleted it of its liquidity, leading to its collapse and seizure by the Department of Financial Protection and Innovation in California. Insolvent and unable to fulfill its financial obligation to customers, the FDIC was required to step in and take over the bank.
What is a Bank Run?
Simply put, a Bank Run occurs when a sizable amount of customers withdraw their money from a bank for fear of financial collapse. Unique to the SVB is the capacity at which customers held their money — many to the tune of millions or billions of dollars.
Given the issues of SVB’s liquidity, it could not handle the capacity at which the money was pulled, ultimately leading to its collapse.
The Big Picture
With the takeover, the FDIC worked to develop a “bridge bank” for users to gain access to their funds, which went live in March 2023. Titled the “Silicon Valley Bridge Bank,” depositors are not expected to lose any access to their money.
Per the FDIC:
“A bridge bank is a chartered national bank that operates under a board appointed by the FDIC. It assumes the deposits and certain other liabilities and purchases certain assets of a failed bank. The bridge bank structure is designed to “bridge” the gap between the failure of a bank and the time when the FDIC can stabilize the institution and implement an orderly resolution.”
The fact of the matter is that the FDIC can step into any bank experiencing liquidity or solvency issues to prevent an all-out collapse. It’s not uncommon for banks experiencing hardship to be taken over by the FDIC to mitigate risk and bring solvency to bank accounts.
You may have seen a sticker that says “FDIC Insured” on the door of your local branch. This means that the FDIC is ready to protect depositors up to $250,000 in the event of bank failure.
Depending on your wealth, that could be enough. But for high net-worth individuals, that could raise an eyebrow.
As we’ve learned from the collapse of SVB, the FDIC is capable of recovering access to 100% of funds from depositors. However, this is not always guaranteed.
Strategically, this means that any depositor may ensure the protection of their funds by opening accounts at multiple banks.
Need to calculate how much of your funds are covered? The FDIC has an online tool, The Electronic Deposit Insurance Estimator, to evaluate your options.
The Banking Industry is OK
Bank failures don’t happen every day. And a bank run as significant as what took place at Silicon Valley Bank is, fortunately, a rarity. The concern was over the availability of capital — liquid cash — which is what SVB did NOT have. But that simply isn’t the case for a majority of banks in the United States.
As noted by Barron’s:
“Virtually the entire industry reports healthy levels of capital, and leading U.S. regulators continue to trumpet the industry’s strong capital levels. Nevertheless, economic reality always trumps accounting in the end. That reality is simple: the industry’s fixed rate assets have declined in value, and the industry has less capital as a consequence.”
Fear is a powerful feeling; it’s why bank runs happen in the first place. It’s important to be proactive rather than reactive; as we’ve learned, reactive depositors can cause a decades-old bank to become insolvent.
Right now, the consensus stands that banks need capital to survive, and consumer confidence is more important than ever to ensure that banks remain solvent. Federal Rate Hikes may bring change to the market, but the rate hikes are not expected to last forever. The need for capital may lower; after all, markets have ebbed and flowed throughout history depending on financial need.
Capital and liquidity continue to be the focus of banking experts. Your priority, of course, should be risk management — keeping in mind the consequence of letting fear control your finances.
With a proper risk strategy and allocation of funds, you’ll be able to protect yourself from any bank collapse AND be covered to the full amount if the FDIC ever needed to step in for your bank.
Seeking assistance with risk tolerance? Talk to an LPSC advisor today.