What is Happening with SVB & How Do I Know if My Bank is Safe?
The collapse of Silvergate Bank, Signature Bank and Silicon Valley Bank have spurred many fears. Here is a breakdown of what happened and what it means for you.
What should you do about the current situation?
Do not panic! As long as you have less than $250,000 in your FDIC-insured bank account (<$500,000 in a joint account) your money is safe. By keeping your money in your bank you’re doing your part to avoid making the problem worse, by not creating a bank run. In the event that your bank happens to follow in SVBs footsteps, the FDIC will get involved.
The Secretary of the Treasury Janet L. Yellen, Federal Reserve Board Chair Jerome H. Powell, and FDIC Chairman Martin J. Gruenberg released a joint statement Sunday announcing that they will go beyond the scope of FDIC insurance to insure all depositors of the three banks will have access to ALL of their money starting Monday, March 13.
What would happen if everyone took their money out of the bank?
This causes a bank run. A bank run or run on the bank occurs when many clients withdraw their money from a bank because they believe the bank may fail in the near future. As a bank run progresses, it may become a self-fulfilling prophecy as more people withdraw cash, the likelihood of default increases, triggering further withdrawals. This can destabilize the bank to the point where it runs out of cash and thus faces sudden bankruptcy.
What happens to my money if a bank fails?
All banks are obligated to be part of the Federal Deposit Insurance Corporation (FDIC) which is insurance on customers' accounts of up to $250,000. If you have $250,000 or less in your bank account your money is guaranteed by the United States Federal Government. Since the FDIC’s inception, no depositor has ever lost a penny of FDIC-insured deposits. The insurance coverage limit is $250,000 per depositor, per ownership category, per FDIC-insured bank.
In this case, in order to help calm the markets, United States Secretay of the Treasury, Janet Yellen has approved actions to enable the FDIC to complete its resolutions of Silicon Valley Bank and Signature Bank in a manner that fully protects all depositors, both insured and uninsured. These actions will reduce stress across the financial system, support financial stability and minimize any impact on businesses, households, taxpayers, and the broader economy. (Federal Reserve Press Release)
So What Is Going On With SVB, Silvergate & Signature Banks?
Silicon Valley Bank (SVB) was a commercial bank headquartered in Santa Clara, California. SVB was the 16th-largest bank in the United States at the time of its failure on March 10, 2023, and was the largest bank by deposits in Silicon Valley.
Signature Bank was a New York-based bank that was the cornerstone of the cryptocurrency industry and the third bank (the first being Silvergate Bank) to shut down. While the details for each bank are different their relationships and exposure to highly volatile customers and products led to a run of their deposits by their customers.
Being the largest of the three banks to fail, SVB had a number of things happen to them in the last week. First, their reported Net Interest Margin (NIM) declined to 2.0% in Q4 of 2022, which signaled a concern about the health of their banking operation. Second SVB was a specialized bank; they operated as the primary bank for the tech and life sciences startup economy. Their customers were primarily venture capitalists (VC) and start-ups. By March 9th, 2023 customers of SVB had withdrawn a total of $42 billion leaving the bank with a negative cash balance of about $958 million.
When the Federal Reserve increases interest rates it affects the whole financial system, the increase in rates is meant to slow down the economy. For SVB this meant less demand for loans from VCs and startups because interest rates on loans were less desirable. This also meant that VCs and startups were depositing less and leaving less cash in the bank because they were using more cash to fund their own operations.
To combat this imbalance, SVB tried selling some of its assets and because of rising interest rates, ended up losing $1.8 billion. This along with the other factors mentioned above spooked investors and customers. This created a bank run; meaning their customer base panicked and pulled their money out of the bank. If NIM is a blood pressure reading, think of money as the blood that keeps the bank alive. No money, no bank.
Credit, like loans, is one of the primary ways banks make money. Normally, when rates increase banks should make more money, this is where the NIM calculation comes in. Higher interest rates for the credit given out versus the interest rate offered to customers widen and this should keep a bank healthy.
But when that bank can’t loan money out and their primary customers are using up their cash the bank has less money overall to conduct banking operations and starts to become illiquid.
Who does it affect?
Because SVB was the 16th largest bank in the US, this created fear within the broader financial industry and people started questioning whether their money was safe in their own bank. To be clear, SVB's customer base was primarily startups and venture capital firms. That’s who was primarily affected, but the banking and financial system also requires confidence for it to work. We as a society need to be confident that the banking system works and that our money is safe in order for the system to continue working.
Definitions:
Net Interest Margin (NIM) is one of many indicators that helps determine a financial company’s profitability. Think of it as a way to measure a bank's blood pressure. The calculation is the difference in the net interest income generated from products like loans, mortgages, and other credit products versus the outgoing interest paid to clients/members that have savings accounts, certificates of deposits (CDs), and other similar products. In short, its interest income versus interest expense. If the net interest margin is positive then the financial firm is considered profitable, if it is negative then there’s an implication that the financial firm is not profitable or needs liquidity. Normal blood pressure is less than 120/80 mmHg. While the NIM fluctuates quarter-to-quarter, the average in Q4 of 2022 was 3.03%. Unlike blood pressure the higher your NIM, the better. So if your bank has a NIM above 3.00% it can be considered healthy.
FDIC: The Federal Deposit Insurance Corporation (FDIC) is an independent agency created by Congress to maintain stability and public confidence in the nation's financial system. To accomplish this mission, the FDIC insures deposits; examines and supervises financial institutions for safety, soundness, and consumer protection; makes large and complex financial institutions resolvable; and manages receiverships.