Give Me Back My Money! Lessons from the Silicon Valley Bank Collapse

Give Me Back My Money! Lessons from the Silicon Valley Bank Collapse

At the beginning of last week, Silicon Valley Bank was one of the largest and most respected banks in the US with total assets of $209 billion and forty years of success. Friday morning, the institution vaporized into receivership — the second largest bank failure in American history.

Much has been written about the why and how of this spectacular failure. Here are the lessons for us as individual investors.

Lesson 1: The Need for Liquidity

Liquidity is hardest to come by when you need it the most. About 65,000 of SVB's depositors had accounts greater than the $250k FDIC guarantee threshold — mostly small businesses and startups. On Thursday alone, $42 billion was withdrawn from the bank, roughly a million dollars per second over the course of the business day.

Personal principle: What will you do if you have a sudden need for liquidity? Do you have multiple sources of cash available? If you own or operate a business, consider having two or more banking relationships, and maintain open lines of credit so you are not caught unprepared. For individual investors, we take our clients through a "Robust Income" exercise to understand where vulnerabilities might lie.

Lesson 2: Know Your Risk

SVB owned over $100 billion of bonds at a rate of 1.76% and a duration of 5.6 years. When the Fed raised rates by 4.50%, the value of those low-rate bonds dropped steeply. SVB was forced to liquidate at a terrible time, realizing devastating losses.

Personal principle: Do you know what the risk actually is in your portfolio? We run our clients' portfolios through stress tests to project what might happen during inflation, increasing interest rates, or a severe market downturn. Understanding your real risk allows you to make better decisions.

Lesson 3: Banks Are Risky Too

Many people assume that bank deposits are completely safe. Up to $250,000 per depositor per account type is FDIC insured. Beyond that, you are an unsecured creditor of the bank. If you have more than $250k at a single institution, consider spreading deposits across multiple banks or using CDARS (Certificate of Deposit Account Registry Service) to extend FDIC coverage.

We remain committed to helping you navigate any environment. Please don't hesitate to reach out with any questions or concerns.