About the Silicon Valley Bank failure

The biggest financial news these past few days has been the failure of Silicon Valley Bank (SVB)!

On Friday (March 10), U.S. regulators abruptly seized Silicon Valley Bank’s assets, marking the largest bank failure since Washington Mutual collapsed during the worst part of the financial crisis more than a decade ago. Silicon Valley Bank was the 16th-largest bank in the United States, with depositors consisting mainly of people in the tech industry and venture-capital-backed companies. The bank failed after depositors rushed to withdraw funds over concerns about its balance sheet. This was the second-largest bank failure in U.S. history, behind only Washington Mutual.

Shortly before noon Eastern Time, the Federal Deposit Insurance Corporation (FDIC) stepped in and shut the bank down. Notably, the FDIC did not wait until the end of the business day to take over the bank, which is the typical process for an orderly bank closure. The FDIC was unable to immediately find a buyer for the bank’s assets, showing just how fast depositors were pulling money out. The bank’s remaining uninsured deposits are now frozen in receivership.

The FDIC said the bank had total assets of $209.0 billion at the time of failure. It is still unclear how much of its deposits exceeded the $250,000 insurance limit, but prior regulatory filings showed that most of the bank’s deposits were above that threshold.

The FDIC said Friday that deposits under the $250,000 limit would be available on Monday morning.

In addition, according to unconfirmed reports, Meta (Facebook) and Roku both held a significant amount of cash at this bank, so their cash flow was likely affected quite a bit.

A bank failure sounds scary, but the failure of a single bank usually does not have a major impact on most individual consumers. Below, let’s go over the issues that are most relevant to us.

If a bank fails, what happens to our money?

If you were unlucky enough to have deposits at Silicon Valley Bank, would you still be able to get your money after the bank failed? For most people with deposits under $250,000, that money is protected by the FDIC. The FDIC, or Federal Deposit Insurance Corporation, is a U.S. government-created agency established during the Great Depression to provide deposit insurance for bank customers. Right now, the standard maximum insurance amount is generally $250,000 per depositor, per bank, per ownership category. If a bank fails, the FDIC takes over the bank’s assets and repays the insured portion 1:1, including both principal and interest.

So in other words, your money is first protected by the FDIC, and you should ultimately be able to get it back. Since this is insurance, the payout process usually does not take too long. As mentioned in the news above, deposits under $250,000 became accessible on Monday.

But there is one important caveat: not every asset at a bank is FDIC-insured, and not every bank has FDIC coverage. If you are concerned about this risk, I would suggest using only FDIC-insured banks and only buying FDIC-insured banking products or deposits. Common examples include:

  • Checking accounts. Demand deposits (checking accounts of a type that formerly could not legally pay interest), and negotiable order of withdrawal accounts (NOW accounts, i.e., savings accounts that have check-writing privileges):
  • Savings accounts and money market deposits. Savings accounts and money market deposit accounts (MMDAs, i.e., higher-interest savings accounts subject to check-writing restrictions):
  • Time deposits including certificates of deposit (CDs): these are your typical fixed-term deposits
  • Cashier’s checks and interest checks issued by the bank. Outstanding cashier's checks, interest checks, and other negotiable instruments drawn on the accounts of the bank accounts denominated in foreign currencies:

Things like stocks and mutual funds, for example, are not protected by the FDIC.

What if your deposits exceed $250,000?

If you were especially unlucky and had more than $250,000 deposited at Silicon Valley Bank, what then? The good news is that at least $250,000 of it is protected by the FDIC, so at a minimum you should get that $250,000 back in full. The bad news is that the amount above $250,000 may not be fully recoverable, and it could take a very long time before you see any of it.

Once a bank is taken over by the FDIC, the agency will usually try to find another institution to assume those assets (or liabilities) and customer accounts. Obviously, if the company’s assets were greater than its debts, it would not have gone bankrupt in the first place. In other words, if the bank’s assets are not enough to cover all deposits owed, then it is impossible for everyone to recover 100% of their remaining uninsured deposits. In a typical corporate bankruptcy, the repayment order is: (1) secured creditors, (2) bankruptcy administration costs, (3) unpaid employee wages, (4) taxes owed, and (5) unsecured creditors. That means your deposit claim is relatively far down the line, and by the time it gets to you, getting anything back at all may already be considered fortunate.

Generally speaking, bankruptcy proceedings and court review can take 1-2 years, so this portion of the money is not likely to be available anytime soon.

Of course, it is also possible that a deep-pocketed buyer steps in to take over SVB and makes everyone whole in order to calm the market. That would obviously be the best-case outcome.

How should we handle our current deposits?

First, we should acknowledge that with FDIC protection backed by the federal government, bank deposits are generally considered very low risk. But FDIC insurance only covers up to $250,000 at a single bank. So the simplest approach is not to put all your eggs in one basket. There are plenty of banks offering checking accounts, so you can simply spread your money across multiple banks. For most people, it is unlikely they even have enough cash to max out $250,000 at several different banks anyway.

If you plan to open multiple bank accounts for your deposits, you can choose banks with more branches in your city or banks with better service. That said, my personal view is that since they are all FDIC-insured, you might as well choose banks offering higher account-opening bonuses. If you read the articles below carefully, you will have a good sense of how to earn solid bank account bonuses:

Are other banks at risk too?

Banks are, after all, businesses, so risk always exists. But because of their special role, banks are subject to many additional restrictions from the government and insurers. What banks fear most is a bank run, when depositors all rush to withdraw cash at once. Once liquidity breaks down, the bank may be forced to sell assets at a loss. The more it sells, the more panic it creates. If large numbers of users start a run, the situation can snowball very quickly. Once there are no longer enough easily liquidated assets left, failure becomes unavoidable.

Overall, I personally think larger banks and banks with more physical branches are relatively safer. Banks with a wider range of assets and more comprehensive services are also generally lower-risk. After all, big banks tend to have stronger cash flow, more flexibility, and more diversified assets, which helps spread risk. A more diversified depositor base can also reduce the chance of a concentrated bank run.

For now, aside from bank stocks being dragged down by SVB, other banks still seem relatively okay, unlike the chain reaction caused by the Lehman Brothers crisis. But federal interest rates remain elevated, which still puts a lot of pressure on banks with narrower business models. So if you do have concerns, try moving your money to a larger bank. Chase, BofA, and Citi are generally considered less likely to have major issues.

Before I even finished writing this article, another bank was forcibly shut down and taken over:

I don’t have deposits there. Does this still affect me?

This SVB failure affected not only depositors, but also many Silicon Valley companies and startups. If they were using SVB to run payroll, employees might not get paid on time because of this issue. These companies may need to raise cash elsewhere or sell some company assets to keep operations running normally. If your company unfortunately had a large amount of deposits at SVB, you should prepare for the possibility of delayed paychecks.

In addition, some services we use may have relied on SVB for banking. For example, the cashback checks issued by Rakuten were through SVB, and reportedly there have already been errors when trying to deposit those checks.

Plastiq, which many of us know, also used SVB for banking services. Over the past few days, Plastiq has also been unable to process payments normally. If you have any scheduled payments coming up, make alternative arrangements as soon as possible.