Lessons from Silicon Valley Bank’s failure

SiliconValley Bank (SVB), which catered to technology startups and the venture capital firms that financed them, was taken over by the Federal Deposit Insurance Corporation, or FDIC. (The FDIC is an independent agency of the U.S. government that protects customers of insured banks against the loss of their deposits, up to $250,000, per depositor, if an insured bank fails.)

SVBwas the second-largest bank failure on record and has led many to question the stability of other, similar small to midsized niche banks that provided funding to high-growth sectors like tech and crypto.

Although the SVB story is still unfolding, there are important lessons thatwe can learn.

Every banking consumer should keep their money at FDIC-insured institutions, and individual account balances should remain under $250,000. The FDIC provides separate insurance coverage for different categories of legal ownership (i.e., joint or trust accounts).

The FDIC notes: "This means that a bank customer who has multiple accounts may qualify for more than $250,000 in insurance coverage if the customer’s funds are deposited in different ownership categories and the requirements for each ownership category are met."

If you are unclear about whether or not your various accounts are covered by the FDIC, contact your bank to learn more. Since the FDIC began operations in 1934, no depositor has ever lost a penny of FDIC-insured deposits. Talk about peace of mind.

As the tech sector boomed on the back of lowinterest rates and abundant funding, many of the companies that held accounts at SVBprospered andwere able to deposit a lot of money at the bank.

SVB did what many banks do: It kept what it thoughtwas an adequate amount of cash on hand to meet any withdrawal demands fromits depositors and used "extra cash" to purchaseU.S. Treasuries. To boost the amount of interest they earned, SVBbought longer dated bonds, which are often more price sensitive to interest ratemoves.

Wheninterestwent up, SVB showed a paper loss on their bonds. Normally, that wouldn’t be a problem, but as tech and startup companies came under pressure over the past 18 months, they needed to withdrawtheir deposits at SVB to finance their operations.

To meet those depositor demands, the bankwas forced to sell their government bonds prior to maturity— and at a loss— to free up money. SVBmanagement forgot a core investing concept: Higher yield can increase risk.

For years, the FederalReserve maintained a Zero Percent InterestRate Policy ("ZIRP"). Whenrates remain lowfor long periods of time, it encourages growth but also can lead to outsized risk taking. Now that the Fed has reversed course and is hiking interest rates to beat back inflation, there are unintended consequences, like a bank being forced to sell its "safe" bonds at a loss tomeet its obligations.

After the financial crisis of 2008, the government stepped up the requirements for large institutions, forcing them to keep more cash on hand than small/midsize banks. Additionally, large banks have a more diversified customer and funding base, which can shield them fromsuch shocks.

SVBwas one of the small to midsized banks that lobbied the government to ease the post-financial crisis banking regulations. In 2018, those efforts bore fruit, as theTrump administration reduced regulations and oversight for banks with assets less than $250 billion.

Perhaps with more oversight and higher capital and liquidity requirements, SVB may have avoided this disastrous outcome.

Jill Schlesinger

Jill onMoney