Over the past week there has been a lot of chatter among people and media outlets regarding the state of banks. With the bombardment of information we receive today, I think its very important to keep our filters on to determine what is media hype or legitimate concern.
Silicon Valley Bank
The bank collapsed last Friday and was taken over by federal regulators in order to protect the assets of its depositors. This small bank lent to tech startups and venture-backed healthcare companies--in other words, it was lending to riskier businesses.
With the economy softening, some of these companies experienced their own shortfalls and started to draw money out of the bank. Additionally, SVB had around $21 billion of its assets in long-term bonds—which dropped in value as interest rates increased. Essentially, it became a perfect storm for the bank as money continued to flow out, at the same time as they were selling their bond portfolio at a loss. The final straw was SVB announcing two days before they collapsed, a proposition to sell $2.25 billion in new shares of the bank to cover their losses. After the announcement, some of the companies that had deposits at SVB decided to move their assets out—which is called, “a run on the bank”.
**To provide some perspective, there have been 10 bank failures and 11 credit union failures since the start of 2019. SVB was the largest bank failure since 2009.
As I often say, my crystal ball is on back order at Amazon, but we’d be foolish to think this is an isolated incident. Just over the past week we’ve seen several other banks either being taken over by regulators or experiencing significant share price drops. Now, I would also suggest it does not mean you should run to your bank and withdrawal all of your money. However, this is a perfect opportunity to review your cash holdings and remind yourselves that all federally chartered banks and savings institutions have FDIC insurance (and credit unions have NCUA insurance). This insurance provides $250,000 per depositor, per insured bank, for each ownership category.
To provide further clarification, checking accounts, savings accounts, money market deposit accounts and CD’s are all covered by FDIC. A common misconception regarding money market type instruments is the assumption that money market deposit accounts and money market funds are the same—they are not, and the ladder is not covered by FDIC. At the end of this blog, I included a link that will help you determine how much of your cash is covered by insurance.
What is Being Done to Support Banks Now
To this point, FDIC has stepped in and fully protected all depositors at Silicon Valley Bank and Signature Bank (even those depositors who have deposits beyond the insurance limits). Additionally, the US Federal Reserve has created a new Bank Term Funding Program which will make virtually unlimited one-year loans available to financial institutions should they experience a run on assets. There is also evidence that other larger banks will step in and provide deposits to struggling banks; as noted by the $30 billion First Republic Bank received in new deposits from the mega banks including Bank of America, Citi, Chase, Morgan Stanley and others. Even foreign governments seem to be setting an example and taking necessary steps to protect their depositors and companies as demonstrated by the Swiss government and its support of Credit Suisse last week.
Will these actions restore faith in the banking system? Maybe, maybe not. But at this point it seems the measures taken over the past week are certainly an effort to maintain confidence. I also think its worth noting that since the systemic banking collapse during great depression, we have implemented numerous safeguards to bolster the banking system and protect depositors.
What You Should Do
There are a few things you can do to ease your mind.
- If you have over $250k at a single bank, take the time to determine if no single account is beyond the insured amount, or if its spread among several accounts, thus qualifying those deposits to be insured.
- You should also look to make sure your money market account is in fact a money market account and not a fund.
- Check out the FDIC calculator. It is very easy to use and will help you determine if you have uninsured cash.
- Feel free to call me if you have any questions or concerns.
Cash Insured Calculator The FDIC website has a wonderful tool to help determine if you have cash that is not covered by FDIC. You can find the calculator here.
As always, please do not hesitate to contact me if you have any questions!