When the Silicon Valley Bank collapsed on March 10, 2023, it was the second largest bank failure in United States history. A couple days later brought the third largest bank failure, when regulators took control of Signature Bank.
When you see news like this, it’s natural to worry about your own money, and what you should do now. Let’s look at what caused these bank failures.
Why Did the Silicon Valley Bank Collapse?
Back when interest rates were near zero, Silicon Valley Bank (SVB) invested in long-term bonds. But then, as interest rates started to increase, SVB began to lose money on those bonds. They announced that they had lost $1.8 billion and quickly needed revenue, which led to depositors quickly withdrawing funds from the bank.
SVB is unique because they had depositors with large sums of money, as opposed to other banks that have many more depositors with less. So when hedge funds quickly pulled their money, those were major losses that SVB could not secure.
That’s when the FDIC stepped in and guaranteed both insured and uninsured deposits, because not doing so presented a threat to the U.S. economy.
Why Did Signature Bank Collapse?
Signature Bank was a casualty of the SVB collapse. After SVB failed, Signature Bank customers withdrew billions of dollars, and the FDIC stepped in again to protect those investments.
On March 19th, Flagstar Bank, a subsidiary of New York Community Bancorp, agreed to take over the deposits, loans and 40 branches of Signature Bank.
What’s Going on with First Republic Bank?
First Republic Bank also began to falter, with its shares sinking more than 45% on March 13. That led to 11 major lenders stepping in to offer a $30 billion lifeline to stabilize the bank.
Similar to SVB, First Republic has a wealthy clientele with few but large deposits, and depositors began pulling out their money after SVB failed. First Republic share prices have been unpredictable since then, and the bank will have some hurdles to overcome to stabilize itself.
Is Another Bank Collapse Coming?
Right now, the economy is in a bit of a precarious situation. The Federal Reserve has had to raise interest rates in order to tamp down inflation. But in doing so, the value of some bank assets have declined.
And now, more than 180 banks could be at risk of failure if half of their depositors withdraw their funds, according to a Social Science Research Network study.
The truth is, there’s no telling how quickly, or how many, other banks will fail. So what does that mean for you?
Protecting Your Money During Bank Instability
We talk about why you need to diversify your portfolio, but that same principle applies to banking, too.
The FDIC insures up to $250,000 per depositor, per insured bank, for each account ownership category. So if you have less than that per account, your money should be protected. If you have more than that amount, it’s very important to diversify where your money is stored. But even if you have less than that $250,000 at your bank, you still might want to keep your money in different banks. Keeping your money in more than one bank is also a smart idea because if a bank does go under, it can take some time for your deposits to be made whole.
Depending on your financial goals, different banks can offer a variety of perks for what you need. For example, you might want one account to be more liquid and accessible, but another account to be reserved for emergencies or long-term savings. Additionally, one bank might charge higher fees for some services, but better fees for other.
Whatever you’re looking for, it’s usually wise to not put all your eggs in one basket. So while there’s no need to make a run on the banks and pull out all your money, you might want to review how much you have in your accounts, and if you need to diversify where your money is housed.
Do you need help planning for your financial future? Contact me today to set up a meeting to talk about your goals.