Recent Bank Failures – How Did This Happen?
Last week Silicon Valley Bank went under and on Sunday, Signature Bank which is based in New York also failed. The government quickly stepped in to protect all the bank deposits at the two failed banks and provided a way for other banks to access more cash as well. The effect of those government moves stabilized the Markets and provided assurance to the Public that the U.S. banking system was solid.
What happened at Silicon Valley Bank?
Silicon Valley Bank (SVB) is based in Santa Clara, CA which is the heart of the technology industry. Most of its customers were venture capital firms with tens and hundreds of millions of dollars at the bank. Since the start of the Covid Pandemic, SVB invested these deposits in Treasury and other government backed bonds which are considered the “safest” investments because they are backed by the U.S. Government. When held to maturity, Treasury Bond holders receive their principal bank plus the interest earned. However since the bonds were purchased at very low interest rates, the value of these investments on SVB’s balance sheet dropped when the Federal Reserve began to raise interest rates starting in late November of 2022. So at the end of SVB’s fiscal year, they had to report $17 billion reduction on their Balance Sheet. SVB created fear among some of it’s very large customers when it announced it was raising additional capital. In doing so, SVB recorded $1.8 billion in losses. News of this reached some of their very large customers which snow balled into a bank run and by Friday of last week the bank received $42 billion of deposit withdrawal requests. The bank could not raise the necessary cash to cover these requests and therefore the bank regulators needed to step in and take over banking operations.
What happened at Signature Bank?
Signature Bank (SB) is based in New York and like SVB was a niche bank that served large private clients. SB marketed itself as a hip alternative to the big banks. Hence, the banks embrace of new alternative investment strategies like cryptocurrency. From 2018 to 2022, SB experienced tremendous growth. This all changed in late 2022 due to the collapse of Sam Bankman-Fried’s crypto exchange FTX that took the cryptocurrency market down with it. SB struggled financially as a result and was already trying to find a buyer when news about SVB spread. SB customers, hearing of SVB’s failure started making massive withdrawal requests that SB could not cover. Therefore, bank regulators stepped in and closed the bank.
The FDIC’s Role
The Federal Deposit Insurance Corporation (FDIC) insurance amount is $250,000. Because account holders at SVB and SB had massive account balances, most of the money held at these banks were uninsured. To prevent a larger crisis from developing and to calm the Markets, the FDIC, along with Treasury Department, the Federal Reserve, and President Biden ruled that it would insure all deposits at these two banks regardless of account size. In addition, the Federal Reserve created a new lending facility called the Bank Term Funding Program. Banks can use this fund to borrow cash and cover deposit requests.
What Can You Do to Protect Yourselves?
Bank failures in the United States are exceedingly rare but as Silicon Valley Bank and Signature Bank illustrates, they can happen. Therefore, it is prudent to be aware of the amounts of money you hold at a particular bank. If possible, maintain balances only up to the FDIC insurance limits and maintain balances at several banks if needed. The standard deposit insurance amount is $250,000 per depositor, per insured bank, for each account ownership category. Below are a couple of examples to illustrate this point.
Example 1: John smith is a single depositor with two single accounts at Bank A. One account has a balance of $100,000 and the other account for $300,000. He also maintains an IRA that has a balance of $35,00. His total single account balance at the bank is $400,000 and he is insured up to $250,000 and $150,000 is uninsured. Because his IRA account is also insured up to $250,000, his entire balance of $35,000 is covered.
Example 2: Jack and Jane Doe are joint depositors at Bank A and as joint holders have $500,000 in combined FDIC insurance coverage. They have one joint account for $200,000 and another joint account for $400,000 for a total of $600,000. This means that $100,000 of their joint accounts are uninsured. In addition, they have Revocable Trust account with a balance of $300,000. The Trust account is insured up to $500,000 so the entire balance is covered.
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This content is developed from sources believed to be providing accurate information and provided by Attune Financial Planning. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information only.