Two major regional U.S. banks – the Silicon Valley Bank in California and Signature Bank in New York – collapsed last week.
Silicon Valley Bank (referred to as S.V.B.), was considered by many tech start-ups and investment firms as their “reliable banking partner.”
The bank was known for betting on start-ups that no other banks would touch (red flag?)…
Some tech start-up founders and workers had gotten their first business loans and even home mortgages and car loans from the S.V.B.
Many venture capitalists set up their accounts at Silicon Valley Bank in 1980s, when the tech industry boom started.
So, what happened?
How could this established bank with its “pristine-reputation”, who housed money for some of the richest investors and well-known venture capitalists, collapse?
There were several reasons for this fiasco, of course….
And what’s interesting, the main cause of the S.V.B. failure was not investing in risky cryptocurrencies or any other elaborate financial schemes….
In my opinion, some of the main causes of this bank’s failure were a series of BAD tactical and ill-informed strategic decisions….
In short, staggering incompetence of the bank’s management.
As you know, 2021 was a year of booming stock market, fueled by record-low interest rates….
Cost of money was so chip that numerous tech start-ups were popping up like mushrooms during a good rain season.
So, the S.V.B. was taking cash deposits from its tech start-up customers and was investing this money into various long-term, low-yielding Treasury bonds that were purchased before interest rates began to spike in 2022….
At the time, those investments looked safe…because interest rates were historically low.
However, these investments became increasingly risky once interest rates rose in 2022 and the Treasury bonds lost their value (because bonds’ prices go down when interest rates go up).
S.V.B’s “banking geniuses” should have known that out-of-control government spending and constant money printing will lead to high inflation… and high inflation will crash bonds’ prices…
And since the cost of capital became more expensive, many tech start-ups needed to pull their cash deposits out of the bank to pay for their expenses… and S.V.B. had to sell some of its bonds at a loss to meet its obligations.
But there is more to this story….
While S.V.B. was a relatively small regional bank (the 16th-largest bank in the country), it’s fair to say that it had a preferred-bank reputation in the tech community of the Silicon Valley…because of its risk-off attitude towards its operation.
Here’s what I mean by “risk-off” attitude: Out of Silicon Valley Bank’s $173.2 billion in deposits, only $21.7 billion was insured!
In other words, over 87% of the S.V.B’s customers, who deposited their money into this bank, were risking not getting their money back!
Apparently, regional banks have looser “bank solvency requirement” than bigger national banks…
Anyhow, the S.V.B. customers and investors panicked and the bank’s shares plunged more than 60% last Thursday, then another 60% last Friday, then banking regulators stepped in and took over SVB Financial.
Then last Sunday another bank was taken over by federal bank regulators – Signature Bank in New York.
Now Moody, which is financial credit ratings firm, cut its outlook for the entire US banking sector and placed six US banks on review for potential credit rating downgrades, in the wake of Silicon Valley Bank collapse.
Moody warns consumers that more banks will come under pressure after SVB’s failure — particularly those with large amounts of uninsured deposits and long-term Treasury bonds that have crumbled in value.
Further, Moody’s said it expects pressure on the banking sector to persist as the Fed continues to hike interest rates to combat inflation.
So, here’re some of the lessons YOU can learn from this S.V.B failure story:
1. Be Mindful of the Interest Rates Trend. Many corporate clients (especially tech start-ups) are very sensitive to high cost of capital (like what we have right now – rising interest rates). When interest rates rise, long-term Treasury bonds lose value…Therefore, make sure you don’t invest your cash in long-term bonds that will lose value when interest rates rise.
2. Be careful with keeping all your money with regional banks. It appears that larger national banks have more strict banking regulations and liquidity requirements than regional banks.
3. Make sure your cash deposits and banking products like CDs are FDIC-insured. FDIC is Federal Deposit Insurance Corporation, which guarantees safety of your bank deposits up to $250,000 per person or per banking product. That’s why people who have more than $250,000in cash have accounts with different banks…
Not all financial institutions are insured by the FDIC (e.g. credit unions don’t offer FDIC insurance).
Always make sure that your money deposit is covered by the FDIC.
If your money is kept with an FDIC-insured bank, you’ll at least be guaranteed to protect your principal up to $250,000.
So, even if you have more at the bank, you’ll at least get reimbursed up to that limit.
Generally, there’s no maximum amount you can have on a checking account.
However, there’s a limit on how much of your checking account balance is covered by the FDIC (as of now, it’s $250,000 per depositor, per financial product, per financial institution).
4. Become Financially Savvy. Consider Alternative places to put your money to. While FDIC protection for cash deposits makes banks look appealing in difficult times, consider alternative places to put your money to.
You may consider
– real estate investments that produce income… but can be more risky AND
– precious metals like gold, silver and platinum, which offer NO income but a hedge (aka protection) against devaluation of your fiat money AND
– dividend paying established undervalued stocks
Remember that NOTHING is guaranteed in this world, NOBODY cares more about your money than you, and it’s your responsibility to be a SAVVY manager of your money.
5. Do Risk / Return analysis. While all investments involve risk, some carry higher risk than others… and provide higher return… and some investments are high risk and low return….
So, when you invest, be very clear about the risk you’re willing and NOT willing to take …
Diversify your investments across different assets to reduce your risk and maximize your return.
For example, remember that the following financial products are NOT insured:
- Stocks
- Bonds
- ETFs
- Mutual funds
- Crypto currencies
- Life insurance policies
- Annuities
- Municipal securities
- Safe deposit boxes or their contents
Let me know your top 3 insights from reading this article.
What actions are you planning to take to protect your savings and investments?
To your Health, Wealth, and Freedom!
