Who’s SVB? How come I haven’t heard of them?
Silicon Valley Bank (SVB) is a commercial bank that specializes in providing financial services and solutions to technology and life sciences companies, venture capitalists, and private equity firms.
While SVB may not be as well-known as other big banks, it's a really important bank for people in the tech industry. It helps them get the money they need to start and grow their businesses. SVB primarily serves a specific niche of clients, such as startups, venture capitalists, and private equity firms, rather than individual consumers. It has provided funding and banking services to some of the biggest names in the tech industry, including Apple, Google, and LinkedIn.
What’s up with SVB?
Last week, an announcement by the bank to sell some stock to secure more money for some poorly timed investments created panic for consumers, who freaked out and began withdrawing funds resulting in the government stepping in and shutting down the bank to protect any further damage.
Why did this happen?
Banks doing, some bank things…
As tech companies took off during the pandemic, and interest rates were low, SVB invested significant amounts of deposits into Treasury Bonds (issued by the US government that guarantee a rate of return) - smart way to make some money. 🤓
More inflation -> Fed increasing interest rates to control inflation -> Treasury bonds less valuable
To counter inflation, the Federal Reserve has increased interest rates, those bonds have become worth less. That wouldn’t normally be an issue — SVB would just wait for those bonds to mature — but because there’s been a slowdown in venture capital and tech more broadly, deposit inflows slowed, and clients started withdrawing their money.
What happened this past week?
Well, we saw first hand the emotional impact of money - that resulted in an old-fashioned run on the banks.
A run on a bank occurs when a large number of depositors, fearing that their bank will be unable to repay their deposits in full and on time, simultaneously try to withdraw their funds immediately. As more people withdraw their funds, the probability of default increases, prompting more people to withdraw their deposits. In extreme cases, the bank's reserves may not be sufficient to cover the withdrawals.
Wednesday, March 8th
SVB’s parent company, SVB Financial Group, said it would undertake a $2.25 billion share sale after selling $21 billion of securities from its portfolio at a nearly $2 billion loss. The move was meant to shore up its balance sheet. Instead, it spooked markets and clients.
Thursday, March 9th
Big-name VCs such as Peter Thiel and Union Square Ventures reportedly started to tell their companies to pull their money out of the bank while they could, coupled with social media frenzy, customers withdrew a staggering $42 billion of deposits by the end of Thursday. By the close of business that day, SVB had a negative cash balance of $958 million.
Friday 10th March
SVB stock price plummeted, and trading was halted. The Federal Deposit Insurance Corporation (FDIC) stepped in to shut down SVB to protect both the bank and customers.
NB: The overall banking industry is likely fine, and again, SVB probably would have made it through had everybody not freaked out at the same time.
What happens to people’s money? What’s the FDIC?
Firstly, the FDIC protects our money in insured banks in the unlikely event of an insured-bank failure. Each depositor is insured to at least $250,000 per insured bank. FDIC deposit insurance is backed by the full faith and credit of the United States Government.
Though, the FDIC does not insure money invested in stocks, bonds, mutual funds, life insurance policies, annuities or municipal securities, even if these investments are purchased at an insured bank.
So, all insured depositors at SVB will have full access to their insured deposits (up to $250,000) no later than Monday, the FDIC announced.
What about customers who aren’t insured?
$250,000 isn’t a lot for a corporate customer, especially those who have closed funding rounds. SVB clients who had accounts with more than $250,000 (the excess of which is not covered by the FDIC) will be paid an advance dividend within the next week and given a receivership certificate for the remaining amount of their uninsured funds (basically an IOU).
As the FDIC sells the assets of the now-closed bank, they’ll be eligible for dividend payments from that. But it could be quite a while before they see that money (and there’s no telling how much it will be).
I don’t have an account with SVB, but should I pull my money out of my bank?
No. There’s no need to worry, especially if you have less than $250k in each bank. Your money is safe and protected by the US government.
But, it’s always good practice to have multiple bank accounts, across different banks to make sure you’re taking some basic protections, and your accounts are fully covered by the $250k FDIC insurance.
How can I protect myself from this happening to me?
It’s always important to have a plan in place before you’re ever faced with a difficult situation, especially with respect to your finances.
When we’re faced with risky situations, our irrational self takes over, and we might make poor decisions. One way to deal with this is to consider what might go wrong, in normal times and have a plan you can use.
In this case, the smartest thing to do is to have multiple bank accounts across different banks, so that you’re diversified, and protected by the FDIC’s $250k limit.
I want to learn more, can I talk to someone?
Ofcourse, you should reach out to your bank if you have more questions, they’ll be more than happy to help you understand how they’re protecting your money.
If you need to talk to someone about the anxiety or fears, reach out to us, and come talk to our financial coaches, who will help you understand your circumstances and help you put a plan in place.
A word about the US Banking System
The banking system in the US, is one of the strongest and most powerful institutions in the world. It’s a culmination of hundreds of years of thoughtful regulation, and backed by the largest economy in the world.
We’re fortunate to live in a place, and at a time when we can not only trust banks, but have so much choice. The US banking sector learned many lessons from the recession of 2008, and put in place additional steps to protect consumers.
So, take a moment to appreciate how well the government is stepping into protect both corporations and consumers.
