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Klingman Insights
Shortly before noon on Friday, regulators from the FDIC shut down Silicon Valley Bank (SVB) and placed it into receivership. This situation developed very quickly and surprised the markets. Although it was a “regional” bank, SVB’s $209 billion in assets made it the 16th largest bank in the United States at the time of its collapse. It is the largest bank failure since the collapse of Washington Mutual in 2008 at the height of the Great Financial Crisis.
It’s important to point out that Silicon Valley Bank had a fairly unique business model in the banking industry. Unlike most regional banks that loan money to a mix of local residents, small businesses, and larger corporations, SVB primarily lent to a select group of companies – tech startups and venture-backed corporations – and their founders/owners. As these companies thrived over the last number of years, Silicon Valley Bank grew from a small regional lender to one of the 20 largest banks in the U.S.
But beginning in 2022, SVB’s assets (loans and securities) and liabilities (e.g. deposits) became imbalanced. As venture-backed companies began to struggle, SVB’s concentrated deposit base started to “dry up,” with many customers drawing down their cash. To meet these withdrawals, SVB was forced to liquidate its assets. Based on the significant losses realized from these sales, it became evident that SVB had invested billions of its newly found deposits into long-term bonds at historically low interest rates. As interest rates rose throughout 2022 and into 2023, those bonds became much less valuable. Many businesses and large venture capital firms decided that it would be safer to move their assets out of SVB. This triggered a catastrophic “bank run” as customers raced to withdraw their deposits, ultimately forcing the FDIC to step in Friday afternoon to take control and protect depositors as best as possible.
As we are preparing to send out this email there are reports that the Federal Reserve and the Treasury Department will create a new Bank Term Funding Program (BTFP) aimed at safeguarding institutions affected by the market instability of the SVB failure. As such, we expect the impact on the financial markets to be short term.
That said, our team has fielded a number of questions from clients and friends who are concerned about the safety of their assets, regardless of where they are held, in light of what is happening with SVB. This situation offers a painful reminder of why we advise clients to never keep more than $250,000 in a bank account. With a bank deposit, you are loaning money to the bank. The bank takes your money and makes loans and tries to earn a profit on the spread between what it charges on a loan and what it pays you on your deposit. With a bank account, you are insured by the government (FDIC) up to $250,000 per account. Anything above that is an unsecured loan to the bank and is at risk if the bank collapses – these are the “unsecured depositors” you may have read about in the context of SVB.
A bank account is very different from a brokerage account. The accounts our clients have at one of our two primary custodians, Raymond James and Charles Schwab, are brokerage accounts. Our clients have not lent their money to Raymond James Bank or to Schwab other than small cash balances well below the $250,000 FDIC limit. We are investing in ETFs, stocks, bonds, and mutual funds that are held by the custodian. The value of those securities go up and down with the markets, but if Raymond James or Schwab themselves were to get into trouble, your accounts are covered by SIPC insurance that would provide protection and allow your segregated securities to be transferred to another brokerage firm. Any larger cash balances in your accounts are invested in institutional money market accounts or treasury bills.
We will continue to monitor the situation with SVB as the story inevitably unfolds this week. As always, if you have any questions specific to your own portfolio or financial plan, don’t hesitate to reach out to anyone on our team.