A bank run
How often do banks fail? There have been 512 bank failures since 2009. Is that a lot? There were 4,844 banks in the US at the end of 2021. Most of the failures were names you never heard of, and the damage was minimal to depositors. But it’s not zero failures, and every once in a while something happens to illustrate an important point: banks can and do go bankrupt!
Prior to today, it had been 867 days since the last failed bank: that was Almena State Bank in Almena, Kansas. Today though, Silicon Valley Bank collapsed, and this one is a bigger deal. Silicon Valley Bank, or SVB, was the bank for startups: as founders raised money from investors, that cash was put into accounts at SVB.
Banks become insolvent when their liabilities (the amount they owe to creditors and depositors) exceed their assets. When you deposit money in a bank account, that’s your asset, but their liability. The bank makes money by investing your money or lending it out. SVB bought mortgage-backed securities (remember those!) when interest rates were very low and the return on these securities was relatively good. But then interest rates rose, and the value of these assets fell - generally, prices and interest rates move in the opposite direction on these things. At the same time, fewer startup deals were happening, lowering the amount of new deposits that could have been used to offset the losses elsewhere and leading to companies withdrawing more than usual to cover their costs. Rumors started to swirl about the health of the bank, and some depositors withdrew their sizable accounts. And so it went that within about a day and a half, what had been the 18th largest bank in the United States was no more.
Because SVB was so woven into the mesh of the startup world, the fear on people’s minds now regards the startups themselves: if they’ve lost their money, can they even make payroll in the coming weeks?
But will they lose their money? Bank deposits are ensured by the FDIC, but only to a point. Depositors in the 512 banks that have failed since 2009, and really in all banks that failed since President Roosevelt signed the Bank Act in 1933 establishing the FDIC, have been made whole up to the amount of insurance: currently $250,000 per depositor per institution. It’s possible the depositors of SVB will get more, depending on what happens when the bank’s assets are sold. But it’s not a guarantee for sure. And note too that even businesses only get that same $250,000 of protection! This is kind of wild! Even small businesses need to have more cash on hand than that.
It’s unlikely that many people reading this are depositors at Silicon Valley Bank, and so probably no one’s directly affected. But think of the speed with which this all happened, and take a minute to protect yourself:
Consider the places where you hold your money
Add up all your deposits - checking, savings, CD, everything - in your name at one institution. Include half the value of any joint accounts.
If it’s over $250,000, consider moving the remainder to a different bank. Yes, I know this is a lot of money!
While you’re at it, even if you’re below the $250,000 limit, take the opportunity to make sure your cash is working for you: interest rates have been rising, so why not take advantage? Many high-yield savings accounts are paying well over 4% right now, and they’re FDIC insured. You can also purchase 6 month T-bills from the US Treasury, yielding over 5%.