Despite Silicon Valley Bank’s Failure, Your Money is Safe

The average bank customer has nothing to worry about.

It’s the biggest story in markets right now. On March 10, Silicon Valley Bank (SVB) became the second-largest bank failure in U.S. history. Just two days earlier, Silvergate Bank, known for its involvement in the crypto industry, announced its liquidation. And two days after the SVB failure, Signature Bank was closed by New York regulators after it too collapsed due to customers pulling their funds.

This news has sparked fears of more bank failures and wider damage to the economy. It has also led to questions about whether money in banks is truly safe. Here’s what you need to know about what happened and whether it affects you.

What Happened to Silicon Valley Bank

SVB was the preferred bank of tech companies and venture capital firms based in and around Silicon Valley since the 1980s.

In 2020 and 2021, the tech industry experienced a boom. Lots of money was floating around as interest rates dropped to fight pandemic-related economic fallout, thus lowering the cost to borrow, and retail traders piled into tech stocks. What did tech companies do with all this cash? They put it into their bank accounts, like SVB. Flush with cash, SVB turned to U.S. treasury bonds with an average yield at that time of 1.79% to invest these deposits.

When the Fed began raising interest rates in 2022, the bonds that SVB bought dropped in value. After all, why would you buy a bond paying 1.79% interest when you can now buy a bond paying 4%? At the same time, the low interest rate environment that fueled the tech sector began to disappear, meaning fewer deposits were coming in.

On Wednesday, March 8, SVB announced a $1.8 billion loss on their bond portfolio and a sale of $2.25 billion of shares to shore up their balance sheet. This news caused their stock to fall by 60% on Thursday. Amidst all the uncertainty over the bank’s financial health, the tech companies and venture capitals that banked with SVB got spooked and began pulling their money, creating a run on the bank.

By Friday, the bank was unable to cover withdrawals on deposits, and the Federal Deposit Insurance Corporation (FDIC) stepped in and seized it.

When a bank fails, money is typically insured. The FDIC covers each depositor up to $250,000. Even if the bank is unable to give you your money, the FDIC will cover your balances with the Deposit Insurance Fund that all banks pay into. One problem: More than 90% of deposits at SVB were above the $250,000 FDIC limit. That’s because so many of their customers were businesses dealing in large sums of money.

Over the weekend, many businesses that held their deposits at SVB were unsure if they would get their money out or be able to meet the next payroll. There was a question of whether the federal government would step in to cover all deposits or just those under the limit.

On Sunday, the federal government announced they would indeed cover all depositors beyond the normal limit in an effort to stop the crisis from spreading to the rest of the economy. While people debate whether this was a true bailout, the fact remains that the FDIC will cover deposits above the established limit using funds from the Deposit Insurance Fund.

Is Your Money Safe?

All this turmoil has caused many people to wonder, are banks safe places for their cash? In short, yes.

Ever since the creation of the FDIC during the Great Depression, federal regulators have protected depositors from bank runs up to a certain amount. That amount has been $250,000 per ownership category since 2008. This means that individual accounts get $250,000 of insurance and each joint account holder gets a separate $250,000 of insurance. So a married couple with two individual bank accounts and a joint account could cover $1 million of deposits if they spread their cash among the three accounts. Trust accounts, retirement accounts and other categories also get separate $250,000 limits. As long as you stay within those limits, your money is safe. In the case of a bank failure, there may be some temporary delays, but ultimately you’ll get your money.

Another obvious reason a bank failure isn’t a cause for concern is that the vast majority of people don’t keep more than $250,000 in their bank accounts anyway. You probably have even less to worry about if you use a large national bank. Even SVB, a mid-sized regional bank, got a bailout. Larger banks like JPMorgan Chase and Bank of America are almost guaranteed to be bailed out in the case of a crisis. Policymakers are keen to avoid a major financial disaster like the financial crisis from occurring again.

What We Can Learn

There are a few lessons we can learn from this episode.

First, never keep more money in a bank account than is insured by the FDIC. While federal regulators came to the rescue in this case, you shouldn’t count on that becoming the norm for smaller banks. Besides, individuals have no good reason to keep that much money in a bank account. Beyond savings to meet emergencies and medium-term goals, your money should be invested in aggressive assets that grow over time. If you do have some reason to keep more than the deposit insurance limit in a bank account, consider spreading your cash across multiple banks, always staying under the limit.

Second, concentration exposes you to risk. Most of SVB’s customers were in the tech industry in Silicon Valley. This lack of diversification became their undoing. The tech industry was sensitive to interest rates, and when they came down, tech companies felt the pain. SVB’s balance sheet also consisted of bonds with an average maturity of 10 years. The rising interest rate environment meant this bet went bad. This is a lesson on the importance of diversification.

And third, even supposedly safe assets like bonds come with risks, especially when interest rates rise. Don’t make the mistake of thinking anything is ever truly risk-free.

The Bottom Line

I won’t try to guess what happens from here. There are some fears of contagion — things aren’t looking great for the banking sector — but more serious failures may have been prevented by the federal government’s quick action. There’s also speculation that the Fed will slow its rate hikes over fears it raised them too fast and put the economy at risk.

But regardless of what happens, the average consumer has little to worry about when it comes to the safety of the money in their bank. You can take comfort that the money in your bank account isn’t going anywhere.