What a week in the banking world. The second largest bank failure in American history. Yikes.
Here’s the skinny: Silicon Valley Bank (SVB) lost a lot of money causing their customers to get scared and with that fear, their customers tried to withdraw their money causing a run on the bank. That’s when the Federal Deposit Insurance Corporation (FDIC) stepped in and closed the bank. All seems fine right? Because the FDIC will pay them back. Well… there is a bit more to it. Most customers at this bank had more than the FDIC insured amount of $250,000. SVB had very little funding from traditional customer ‘core deposits.’ It was mostly funding related to cryptocurrency startups and tech related companies – very high risk funding methods on their part. The uncertainty about what would happen to customers with more than $250,000 in deposits started to spread to other banks, which began a domino effect of banks hitting red. You can read more about the situation in this great Wall Street Journal Article.
SVB’s balance of both high risk and traditional funding methods were not in equilibrium with one another. It is important that banks have this equilibrium of high risk and traditional funding in order to survive in this economy of rising interest rates.
What can you do to protect yourself and your small business?
One of, if not the, most important lessons from this bank failure is to really ensure that you are mindful of the FDIC Insurance Coverage and your balances within the insured thresholds. In other words, if you have more than $250,000 in any of your bank accounts at this point in time, consider moving any excess over $250,000 to another account in order to maintain FDIC coverage. Simply ‘spreading your money’ around is a relatively low effort way of protecting your assets. While maintaining multiple bank accounts may require a bit more ‘money management’ on your end, it will help protect the amount you carry in the event of a bank closure. For more information about this best utilizing this method, check out this FDIC resource.
Additionally, it is important to “understand that not all banks are created equal. In stark contrast to the nation’s largest banks, community banks operate under an entirely different business model—one that’s based locally and is relationship focused. As small businesses themselves, local community banks take pride in serving the unique needs of their customers and communities. In short, they are in it for the long haul to serve the needs of those who count on them for financial stability and prosperity.” – Rebeca Romero Rainey ICBA CEO. Also, be sure that you are not reacting to public fear and be strategic about where you put your money and continue staying up to date with reputable sources such as the Federal Reserve government website.
Let’s talk about your checking account balances, and any related risk, in our next financial meeting. And, if you’re not a client, learn more about how we can help on our website at mavenfp.com.