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Commentary March 2023

Silicon Valley Bank and a Lesson to be Learned

 Jim Shellenberger CFA, CFP® | Financial Advisor

Due to a combination of factors, Silicon Valley Bank (SVB) was closed down by regulators. Some of these factors include risk management oversight, economic factors, and fear. Just like most things, it is not entirely straightforward what happened, but there are some overarching themes. Silicon Valley Bank targeted a lot of tech startup companies and their founders. This led SVB to be relatively concentrated. Other banks may be more diversified into companies like agriculture, finance, manufacturing, etc.

When a bank gets deposits, it usually invests it in some manner, like lending money to other bank customers. Apparently, $80 billion of the $189 billion of SVB’s deposits were in long-term mortgage-backed securities1. This is where most of the problems lay. If the long-term debt were held to maturity, there would have been no problems. Like all bonds, their price can fluctuate as you own them, so if you plan to hold them to maturity, you are not too worried about it. The next problem was that during 2022, bond yields went up, which meant bond prices went down. We could have another paper explaining this, but know that bond prices go down when bond yields go up and vice versa. This means that the value of many of Silicon Valley Bank’s bonds was at a loss. Once again, they were probably not too worried about it because they had planned to hold them to maturity. Knowing that a large portion of their assets had fallen in value, they needed to raise some cash. When they announced a sale at a loss of $1.8 billion, people got nervous. It didn’t help. This came days after a crypto-focused bank called Silvergate failed1.

For multiple reasons, word got out among these tech startup companies and their founders to get their money out. This caused a bank run. Like many services in society, they could not accommodate a mass request like that. For example, a hospital is built to serve a community, which it can do as people use it sporadically here and there. If everyone in a community showed up to the hospital at once, they would not be able to accommodate it. Same for your local gym. Silicon Valley had requests of $42 billion in just one day2. With their liquidity profile being heavy long-term bonds, they could not stay up with cash withdrawals.

Now for the lesson we can all learn. Only 15% of the accounts were reported to be under the FDIC limit, and by doing some simple math, 85% were over that limit1. FDIC insurance is set to help insure your money at an FDIC institution for problems like this. We, as consumers, need to be conscious of that limit to avoid putting ourselves in a bad position. It is supposed to work out that the FDIC insurance will make you whole for the insured amount and nothing over it. Now, the FDIC has decided to make everyone entirely whole for Silicon Valley Bank, but we should not always plan for that to be the case. Here are the limits for FDIC.

FDIC Insurance Coverage Limits by Account Ownership Category per FDIC insitution

Single Accounts (Owned by One Person)

$250,000 per owner

Joint Accounts (Owned by Two or More Persons)

$250,000 per co-owner

Revocable Trust Accounts

$250,000 per owner per unique beneficiary

Corporation, Partnership and Unincorporated Association Accounts     

$250,000 per corporation, partnership or unincorporated association

https://www.fdic.gov/resources/deposit-insurance/brochures/deposits-at-a-glance/

I encourage everyone to do a cash review to ensure you are under these limits at each FDIC institution you use. Also, while doing a cash review, it is essential to consider that cash yields have increased. Currently, there are CDs yielding respectable amounts for the first time in a while. High-yield savings accounts are also paying a lot more than your checking account. Some local banks have high-yield savings accounts, which are worth the look. Also, we here at Elevate can send an invite for a high-yield savings account for individuals, foundations, and companies. As of March 15th, 2023, it is yielding 4.25%. It is through a banking group called Flourish. If you would like more information on it, please let me know, and I can either send you information or discuss it on the phone or in person. The biggest takeaway is to pay attention to your cash, and if you have a large chunk of cash, make sure to be within your FDIC Insurance limits.

  1. ai – Powering a Personal Wealth Movement. (2023, March 13). Investors wiped out as bank run causes collapse of Silicon Valley Bank. Forbes. Retrieved March 14, 2023, from https://www.forbes.com/sites/qai/2023/03/12/investors-wiped-out-as-bank-run-causes-collapse-of-silicon-valley-bank/?sh=716980ef3e95
  2. Santilli, P., & Benedict, J. (2023, March 12). Silicon Valley Bank’s meltdown visualized. The Wall Street Journal. Retrieved March 14, 2023, from https://www.wsj.com/articles/silicon-valley-banks-meltdown-visualized-3da2263b

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