Katie’s Desk: Silicon Valley Bank Collapse

Silicon Valley Bank’s (SVB) collapse late last week was the biggest news most businesses didn’t get to process before the weekend.

Personally, I saw the headlines, moved on, and then only was able to read more and research over the weekend. However, as I dug deeper into the details of the SVB failure, I realized it was more far-reaching that I thought. The good news was that I finished my research feeling confident that our economic policy and the Fed are already at work making customers whole and at the end of the day it is an exciting study of economics in action.

What happened?

Basically, SVB had large cash balances on deposit after the pandemic, and invested much in longer-term securities. As interest rates have increased (and in a typical example of over-simplifying a complex situation, other factors most likely contributed), this portfolio became risky. Additionally, much of the bank’s securities were focused in tech, which increased risk, due to lack of diversification.

Even banks make oopsies, and sometimes the external factors at play trick the best of us.

As rates have increased and tech has stabilized, the bank became less stable, which ultimately led to a hypothetical run on the bank. SVB announced very late in the week that they needed to raise billions in funding, and quickly, which exacerbated the situation, spooking depositors and resulting in its quick insolvency.

Some of the tech firms affected include Rippling and Avalara. Avalara sent a proactive statement to clients on Friday evening regarding the events at hand, and they will be working to get things back on line this week.

Who is the hero?

Thanks to the formation and quick action of the Federal Deposit Insurance Corporation (FDIC), deposits up to $250K are already insured. The FDIC was formed in 1934 in reaction to the original (OG) bank runs following the collapse of the stock market in ’29. You can think of the Fed as “the banks’ bank.” They have a system of reserves that are meant to cover liquidity issues with their member banks. They only cover certain types of deposits, mainly Checking, Savings, Money Market Funds, and CD’s.

However, SVB’s clients had balances far above $250k in many instances, and there was major concern over how this would be handled. and there was major concern over how this would be handled.

Public pressure pushes for a “bailout” to not occur. First, the idea that taxpayers, including you and me, would need to support a bank’s failure seems counter to sense, and in fact, counter to karma. How often has a bank decided not to foreclose on a house when in a place to do so? Decided to give a family money when they were in a bad spot? (If I was holding my breath for an answer I would be passed out by now).

Precisely.

No one wants those optics, however there is also major concern of the ripple effects SVB’s failures could have on other organizations, not even including the issues experienced by their current clients.

Regulators have promised to cover all deposits, and are promising that it is not a “bailout.”

Yes it is. However, it is needed, most likely. As distasteful as that is.

The Fed is claiming, however, it is going to be funded privately, maybe playing on the fact that the Fed is actually a private quasi-government corporation. Those waters continue to get murky, don’t they?

Are credit union deposits covered?

Credit unions and investment firm deposits are typically not covered. However, credit unions are insured under another organization.

What happens next?

We are watching public policy and economic policy in action. While we all need to wear our common sense hats, doing due diligence on the banks you place your funds with is always important, but also realize that external factors can also cause problems, and be thankful that organizations like the Fed are here to help us deter further economic calamity.

You can typically pull financial statements for public banks from the SEC, and can pull statements from private banks via their investor portal, or ask your banker.

We evaluate our banking relationships regularly, and diversify the banks that hold our funds. When possible, understand that (currently) deposits over $250K can be at risk, but if current events have a play, that limit should be going up.