written by Director of Investments, Jared Jones, CFP®, CIMA®, CeFT®, RLP®
On Friday, news broke that Silicon Valley Bank had collapsed, marking the second-largest bank failure in U.S. history. Although it’s more complicated, essentially, it all boils down to the fastest-ever run on a bank. On Sunday night, a second bank, Signature Bank, failed.
Although SEI is not a bank, we want to take this opportunity to review the safeguards in place for our clients’ assets at SEI. As a private trust company, SEI holds all client assets separately from its business assets and cannot lend or borrow against them. Furthermore, as a member of the Federal Savings Association, SEI is subject to high levels of scrutiny by federal regulators to ensure that assets are protected, and standards are met.
We understand that recent events can be concerning, so we wanted to offer a brief summary of how we arrived at this point and what our clients should focus on as a result.
A Quick Summary of What Happened
Silicon Valley Bank was a regional bank that catered to tech companies and venture capital firms. Until recently, the bank had been quite successful. During the pandemic, the technology industry was one of the bright spots for the economy and stock market. As a result, tech firms made massive deposits at SVB. The bank invested the cash from deposits in long-term US Treasury bonds as a safe measure. However, in 2020 and 2021, interest rates were much lower than they are today.
After the Federal Reserve began raising interest rates in 2022, high-growth and speculative investments, including the tech sector companies, began to suffer. Soon, tech companies previously flush with cash needed to withdraw funds from their bank accounts to make ends meet. At the same time, the US Treasuries that SVB had purchased when interest rates were low became worth much less as interest rates increased.
To address the increasing withdrawal demands, SVB sold a portion of its securities at a big loss. A $1.8 billion loss to be exact. The announcement, made on Wednesday of last week, frightened investors and customers of the bank. There was an avalanche of withdrawal requests on Thursday, leading to a modern-day run on the bank fueled by smartphones and technology. By Friday, regulators were no longer willing to wait to see if SVB could improve its situation. As a result, they closed the bank and turned control over to the FDIC.
Sunday evening, Signature Bank fell victim to closure after concerns over SVB’s collapse spread. Signature Bank had a concentrated client base that included cryptocurrency businesses, which have recently come under heavy pressure. Similarly, regulators stepped in to shutter the bank to protect consumer confidence in the overall financial system.
What Happens Next?
Right now, the biggest concern is that other banks with similar customer profiles may be at risk. Regulators and officials are working hard to ease fears of a bank contagion. Contagions occur when one bank experiences problems, and customers become afraid and withdraw their money from similar banks to protect themselves.
On Sunday, Treasury Secretary Janet Yellen reassured the public on morning talk shows that the US banking system is safe and capable of handling the potential fallout. Later that night, federal regulators announced they would guarantee all balances, including those above FDIC insurance levels, to instill confidence in the financial system. The Federal Reserve has also implemented a lending program for banks to alleviate some of the burden caused by higher interest rates, which contributed to this issue.
Before the announcement that all accounts would be protected, SVB’s customers with account balances surpassing the FDIC’s maximum coverage felt increasingly uneasy. The majority of SVB’s customers had balances exceeding that protection, and many were concerned about the safety of their deposits. Fortunately, all customers should be able to access their funds today.
Protect Your Cash at the Bank
We understand that bank collapses can be concerning, but fortunately, they are rare occurrences. The recent collapse of SVB and Signature is a strong reminder to protect your cash at the bank. Since 1933, the Federal Deposit Insurance Corporation (FDIC) has been established to safeguard customers against bank runs, and we encourage all of our clients to take advantage of this protection.
For your peace of mind, the FDIC insures balances up to $250,000 for single accounts owned by one person. If you have joint accounts owned by two or more people, they are insured up to $250,000 per co-owner ($500,000 for couples).
We want to emphasize that the FDIC provides insurance coverage per banking institution. Therefore, to receive insurance, the total balance across all accounts at each institution must be below the protected amounts. You can still receive full insurance coverage from the FDIC by spreading your assets across multiple banking institutions.
Omega sees this as an opportunity to remind all of our clients to take the following steps:
- Review your bank balances to ensure they are protected by FDIC insurance.
- If you are married, consider adding your spouse to any individual accounts to increase protection.
- If you have cash balances exceeding FDIC insurance, consider spreading your cash across multiple banks.
- Business owners should also review their bank accounts to ensure FDIC protection. Unfortunately, many customers with balances at SVB exceeding protection are businesses. Those business owners had a very stressful weekend worrying about meeting payroll and other business issues.
As this is a developing story, the full impact will be determined over time. At Omega, we will continue to monitor events and remain in touch as needed. Now that cash is finally paying a decent return, we highly encourage everyone to protect their cash fully.