Silicon Valley Bank Situation is Troubling; Here is What It Means for You and Me

The sudden bank run on Silicon Valley Bank (SVB) that materialized over the course of yesterday is quite troubling. The reality is that banks make bets on interest rates, and when interest rates move suddenly in one direction, as they have over the last year, it creates challenges for a bank’s Risk Department. In the case of SVB, they are reported to have very low yielding long term assets, such as 10-year or 30-year Treasuries, that they may have purchased when interest rates were sub-1%. These assets would presumably trade at such a significant discount if they were to sell them today that the bank would not be able to cover its liabilities.

SVB’s situation is both unique and extreme since most of the bank’s depositors are huge venture capital funds and entrepreneurs from Silicon Valley. These are depositors who are so wealthy that the FDIC insurance amounts of $250,000 for an individual ($500,000 for a couple) are entirely inconsequential. Because the depositors are so over-exposed to a failure, a sudden bank run, especially in Silicon Valley where information can also move and be acted on much more quickly than normal.

It is fair to say that ordinarily when banks have unrealized losses, they have the time and ability to borrow from the Fed’s discount facility.

While we therefore would not expect that other banks will have runs like this, there is just one simple thing that depositors can do with their cash to protect themselves, and it is the same advice that I have given since BestCashCow’s founding in 2005.

The advice is to stay within FDIC and NCUA limits at real banks and credit unions. Your money should not only be FDIC-insured or NCUA-insured, but it should be someplace where you have direct access to it, where your name is on the account, and where it is completely transparent what you are in. Taking this advice one step further, I would reiterate my advice to avoid fintechs, even those claiming that they are holding your cash in a government-insured account, and money market accounts. The institutions behind these instruments could easily expose them to either (a) other institutions like SVB, and or (b) be engaged in activities that may involve risk and may not be completely transparent in order to offer deposit rates that are competitive with those that banks are offering.

In short, the safest thing for your money today is quite simply deposit accounts at FDIC or NCUA-insured banks.

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