Why Did SVB Fail?

It all starts with how banks make money... Banks don't keep all our deposited money on hand. They invest some of it. And that's fine unless everybody panics, runs to the bank and demands their money back at the same time.

Blood in the water:

When Silicon Valley Bank’s (SVB) announced their $1.75 billion capital raising on March 6 to secure deposits, people and businesses who had hot (unguaranteed) deposits began to panic.

In SVB’s case, the deposits were primarily invested in long-term U.S. treasuries and agency mortgage-backed securities. But, in late 2022 and early 2023, the Federal Reserve began increasing interest rates to combat inflation.

Why did the increasing interest rates make a difference?

When rates rise, previously made obligations lose value to make them more attractive to investors should they need to be sold BEFORE they mature (are paid back in full at the agreed upon price).

SVB’s investments had lost value and since their clientele of venture capital backed start-ups (whose ability to borrow was slowed) started taking from their cash reserves to fund payroll and bills- forcing SVB to sell their long-term investments AT A LOSS.

Now, this would not have been a problem, except more than 90% of the bank’s deposits were considered “hot” or, over the $250k maximum FDIC insurance limit. Which makes the customers a flight risk at the first sign of trouble.

Back up, what is FDIC insurance? And how does it work?

FDIC insurance is like an “oh sh*t” contingency for banks. Should a bank failure happen, customers at an FDIC-insured institution will receive 100% of their deposits back up to the $250,000-deposit limit per depositor, per bank.

So, the question you might be asking is: Is MY money safe?Short answer- probably.Unless you have more than $250,000 in one FDIC insured institution, you are covered in the event of a bank collapse, HOWEVER...

If you have more, or just want to put your mind at ease: you need to know for sure how healthy your bank really is.Bauer Financial's website shows the financial health of all banks and credit unions in the country. If your bank has a 4 or 5-star ⭐️⭐️⭐️⭐️⭐️ rating, chances are you're worried about nothing! Check yours here: https://www.bauerfinancial.com/star-ratings/ Have more than 250,000 in one bank?

Let's discuss cash management strategies to mitigate any potential risk from large bank deposits. Set up a time to talk >

Read More about the Failure: Planet Money Pieces Together the Failure of Silicon Valley Bank

P.S. What about those “hot” balances?

You may have heard that, contrary to FDIC policy, the FDIC guaranteed to cover all deposits at SVB. It is not a government bailout, but instead, the FDIC will sell the failed bank's assets to others to recoup as much of the deposit obligations as possible.

The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Charlotte Galamb and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.

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