The collapse of Silicon Valley Bank (SVB) and Signature Bank of New York is the headline across major news outlets this week, leading many to wonder if this indicates future banking turbulence and how it will impact longer-term economic growth.
While we can’t predict the future, we can examine what happened, look back on the past, and take action to protect our wealth.
Let’s dive in.
Federal regulators seized the assets of Silicon Valley Bank (SVB) on Friday, March 9, 2023. In an unrelated move, Signature Bank of New York was also taken over by regulators.
Based on early reporting, Silicon Valley Bank was heavily invested in longer-maturity bonds that experienced substantial losses over the past 15 months as interest rates increased.
Customers began withdrawing billions of dollars in deposits (known as a “run” on the bank) because they were anxious about its overall health, and the bank could not cover all depositor withdrawals.
SVB bank was a cornerstone of the tech community, and many of SVB’s customers were venture capitalists or tech startups. While SVB was FDIC insured, the early reporting indicated that 97% of the deposits at Silicon Valley Bank were more than $250,000 per depositor, meaning that almost all of the bank’s promises were not insured by the Federal Deposit Insurance Corp. (FDIC).
In an unprecedented move to protect the U.S. economy, regulators stepped in.
According to a joint statement issued by the Federal Reserve, Treasury, and FDIC, all depositors at both failed banks (even those over FDIC limits) will be paid back in full.
This action aimed to bolster confidence in the banking system and prevent a run at other regional banks.
Why are people feeling anxious?
It is difficult to predict the market response in the future, which understandably can cause financial anxiety. During periods of market stress, you see much short-term movement in an entirely unpredictable market.
Many remember the collapse of Washington Mutual bank and the 2008 financial crisis. While the collapse of SVB represents the second-largest bank failure in the U.S. and the biggest since 2008 (behind Washington Mutual), it is essential to note that the economy is very different today than when Washington Mutual failed in September 2008.
The economy lost over a million jobs in the three months following the Washington Mutual failure.
The economy added over a million jobs in the three months leading up to the shortcomings of Silicon Valley Bank and Signature Bank.
These aren’t the first bank failures (in fact, 489 banks failed from 2008 to 2013), and they won’t be the last.
What actions can we take to protect our wealth?
While it’s normal to worry about the future of the economy, there are actions you can take to protect your wealth.
First, make sure any cash held in bank accounts is under FDIC protection limits.
FDIC insurance covers up to $250,000 per depositor, per insured bank, for each account ownership category.
Second, maintain cash reserves to cover 3-6 months’ expenses. This is good practice even when the economy is doing well.
Third, stick with your long-term investment plan even in the face of short-term market volatility. This may be easier said than done, but staying disciplined in your strategy gives you the best chance of achieving your goals.
Do you want to know you’re making the right decisions with your money? Schedule a 30-min consultation.
Sign up for occasional financial insights in your inbox – everything you need to know about RSUs, Roth IRAs, Tax Strategies, and more.
Disclaimer: For informational and educational purposes only and should not be construed as specific investment, accounting, legal or tax advice. Certain information is based on third-party data and may become outdated or otherwise superseded without notice. Third-party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy or confirmed adequacy of this information. R-23-5263