Sadly, Silicon Valley Bank (SVB, $SIVB), the 16th largest bank in America at the end of 2022, experienced a bank run. Now the contagion has spread to other regional banks such as First Republic Bank, Signature Bank, Zions Bancorp, PacWest, Comerica, and Charles Schwab. Even the largest banks were getting hit as well.
Ultimately, The Federal Deposit Insurance Corporation (FDIC) said on March 10, 2023, it would take over SVB and that its depositors with up to $250,000 will have access to their deposits no later than Monday morning, March 13, 2023. In the meantime, the FDIC will find a buyer so that depositors with over $250,000 will also be made whole.
The bank had $209 billion in assets and $175.4 billion in deposits. Roughly 87% of Silicon Valley Bank's deposits were uninsured as of December 2022, according to its annual report.
Thankfully, the Federal government decided to protect all SVB depositors on Sunday, March 13. The Feds also shut down New York’s Signature Bank and guaranteed all its depositors to help stop the contagion.
But will it be enough for the regional banks? So far in 2024, there haven't been further bank runs and the system is hanging on. With interest rates peaked and expected to come down by end of 2024, banks could be saved.
Why Did The SVB Bank Run Happen?
First, the bear market happened in 2022. As the stock market declined, so did SVB's share price by 66%. Its clients couldn't raise as much capital or keep depositing as much capital at SVB. SVB focuses on lending to technology companies, startups, biotech, venture capital, and private equity firms.
Second, the Fed aggressively raised interest rates. The higher interest rates went, the more expensive SVB's cost of capital, which are its deposits. SVB had to pay higher interest rates to attract and retain deposits to stay competitive. In general, this is fine because banks can then lend out deposits at an even higher rate of return. This is called the Net Interest Margin, or NIM.
Third, in 2021, SVB supposedly invested about half of its deposits into 3-10-year Treasury bonds yielding 1.63% on average. SVB planned to hold them to maturity (HTM). Unfortunately, buying 3-10-year Treasury bonds in 2021 was close to the top of the market. After the Fed aggressively started raising rates, the value of its HTM portfolio tanked.
Borrowing Short And Lending TOO Long
You would think holding Treasury bonds until maturity would be safe. And it is if you own all the money. However, SVB was reinvesting short-term customer deposits, which became increasingly costly as the deposit interest rates they had to pay rose to over 4%. In such a scenario, the bank is losing money (negative Net Interest Margin). SVB borrowed short and lent too long, painful when the yield curve inverts.
Then when SVB decided to raise $3 billion in equity to cover its shortfall, and couldn't, the bank run accelerated.
A Bank Run Is A Crisis Of Confidence
Silicon Valley Bank's clients began withdrawing money because they no longer felt confident their deposits would be accessible.
Imagine if you were a money-losing startup that just raised $20 million. Your cash runway is 18 months until you need to raise another round of financing. The risk of losing all your capital at SVB, through no fault of your own, is immense. Hence, the rational move would be to withdraw all your deposits and move them to a larger bank like Chase.
Unfortunately, there's no upside in leaving your deposits at a bank that is experiencing a bank run. If the bank survives, it's not like you're going to get much better terms (high deposit rates, lower fees, etc). If the bank doesn't survive, you risk losing everything.
Thankfully, the FDIC stepped in to ensure SVB's depositors are made whole. Contagion is bad, especially given it negatively affects innocent parties.
Currently, thousands of startups are being negatively impacted because their money is stuck at SVB. They might not be able to pay vendors and make the next payroll.
Even The Best Capitalized Banks Are At Risk Of A Bank Run
The tier 1 capital ratio measures a bank’s core equity capital against its total risk-weighted assets—which include all the assets the bank holds that are systematically weighted for credit risk.
Think about the tier 1 capital ratio as a capital buffer to absorb losses and remain liquid enough to withstand a bank run. The higher the tier 1 capital ratio, the safer you are.
The average Tier 1 capital ratio for the biggest banks is around 14%, which is higher than it was during the 2008 global financial crisis. However, if more than 14% of a bank's depositors decide to withdraw funds at any given moment, the bank will likely shut down.
Banking is supposed to be a low-risk business that can generate profits with leverage. The more money a bank can lend out at a positive Net Interest Margin, the more profit it earns. The only problem is when too many depositors decide they want their money back. SVB needed to sell its HTM securities at a loss to make its customers whole, which ended up creating more losses.
If you're a regional bank like SVB, even with a 25% tier 1 capital ratio, it would be much easier for more of its clients to decide to withdraw their deposits. SVB was the largest bank in Silicon Valley with over 26% market share.
Will The Bank Run Contagion Continue?
Sadly, the Silicon Valley Bank bank run is likely the start of more bank runs to come. We already had the collapse of FTX, which looks more and more like fraud. Now the bank run contagion has spread to Europe with Credit Suisse succumbing to a takeover by archrival, UBS.
Plenty of innocent individuals and companies will lose lots of money. After all, the FDIC only insures deposits up to $250,000 per depositor, per insured bank. And most of SVB's customers were companies with way more than $250,000.
I recommend having three banking relationships to optimize terms and protect your assets. Even if you don't have over $750,000 in cash deposits, having multiple financial relationships helps make things easier.
Leverage is great for making money on the way up, but destroys investors on the way down. And right now, regional banks are getting destroyed thanks to a funding mismatch at SVB and a crisis of confidence.
First Republic Bank ($FRC), one of the best-run regional banks, is also getting hammered. Its customer base is more mass affluent retail as opposed to startups and venture capital companies. In First Republic Bank's 1Q 2023 earnings report, management took zero questions as the bank lost over $100 billion in deposits (half of total). First Republic Bank will be under new ownership as of May 2023. This is deposit an injection of $30 billion of deposits from larger banks.
The Federal Reserve Wants People To Lose Money To Suppress Inflation
The sad thing is the Federal Reserve knew these types of bank runs would happen. It is inevitable banks would experience mark-to-market losses in their bond holdings if the Fed raises too much too quickly.
Yes, Silicon Valley Bank made a mistake by buying too much long-duration Treasury bonds near the top of the market. Instead, it should have bought shorter-duration Treasury bonds to better match its liability duration, despite the lower Net Interest Margin.
But what's done is done. The middle-class is going to get crunched. The Fed knew banks like SVB and other regional banks would suffer from their actions, and they hiked aggressively and quickly anyway. The CEO of SVB was a Director at the SF Fed from 2019 until SVB went under.
The Fed also knows that causing a recession will lead to millions of jobs lost. But as I've written before, the Fed cares more about its legacy than for the well-being of middle-class American citizens. After all, the Fed governors are all powerful and rich.
Yes, as more people lose money and their jobs, the prices at grocery stores and gas stations will likely decline as demand wanes. However, please make sure you're not one of the millions of people who lose their livelihoods in the progress!
Innocent and good people at SVB and its depositors who had nothing to do with management’s decisions and the Fed’s desires are now suffering. This is terrible.
Hopefully, the downfall of First Republic Bank will result in the banking system healing. Everybody knows what's at stake and depositors and bank managers have had time to make adjustments to prevent contagion.
Learned My Lesson To Not Depend On The Government In 2008
I remember Monday, September 15, 2008, like it was yesterday. It was the day Lehman Brothers went bankrupt.
On the Friday before, I bet my colleague, Will, on the trading floor $100 the government would bail Lehman Brothers out over the weekend. How could the government let contagion spread? I even bought 100 shares of LEH in solidarity. Oops.
It was then that I realized not to rely on the government for my financial well-being. Instead, it was best to only rely on ourselves. The idea of the new three-legged stool for retirement was hatched, and away I went to start Financial Samurai the next year.
Please don't rely on saviors. They will only let you down.
Feeling Pain May Change You For The Better
The good thing about not getting bailed out is that you feel enough pain to change your ways.
After the global financial crisis, I decided to work harder, save more, and invest more prudently. My net worth became more diversified and I developed new income streams to buttress my day job income.
Without the 2008 global financial crisis, Financial Samurai would not have been born in 2009. Because up until 2008, making money was easy. Why create contingency plans?
In the short term, the ecosystem surrounding Silicon Valley Bank will take an uppercut to the chin. The contagion will spread to other regional banks, which will experience their own bank runs.
The big banks will gain more deposit dollars to make bigger profits. With the influx of more deposit dollars, deposit interest rates will likely decline, thereby making big banks even more money in the long run. That's right, the big banks are long-term beneficiaries when regional banks collapse.
If there is no trust in the banking system, our economy will suffer. Hence, the FDIC taking over SVB and making innocent depositors whole is a net positive. SVB shareholders get wiped out, but that's the cost of investing in risk assets.
What Does The Bank Run Contagion Mean For Us?
If you have more than $250,000 per account at one regional bank, you may want to spread out your money to other larger banks like JP Morgan Chase, Citibank, Bank of America, and Wells Fargo. It's easy to do thanks to online banking. All the biggest banks have seen an inflow of deposits at the expense of regional banks.
If you run a business, it's easy to let your idle cash sit in your business checking or savings account earning less than you could. I'd contact the bank and invest some of that cash into a short-term CD with a higher rate, up to $250,000. Then I'd extract the rest and leave enough only for working capital.
If you face a capital call with a venture capital, venture debt, or private equity firm that does banking with Silicon Valley Bank, I wouldn't wire the funds now. If you do, your funds could get stuck for who knows how long even though the FDIC has taken over and promises to make depositors whole. Take a wait-and-see approach instead.
If you have investments with a private fund that does banking with other regional banks, I would contact the funds' general partners and ask for clarity if they have yet to communicate their plans. Again, it's not worth transferring capital yet until you know the funds can be reinvested by the fund. The reality is, everybody is scrambling.
Finally, please have enough liquidity to cover your living expenses just in case you lose your main source of income. You don't want to have to conduct a fire sale to raise funds in a down market. The ideal number of banking relationships is three or more.
No Need To Be A Hero And Take Excess Risk Now
The current investing landscape is fraught with unknown risk, largely due to an overly aggressive Fed. Yes, we must also blame a bank's investment committee that made poor investment choices as well. Other banks and companies will inevitably collapse due to contagion.
Hence, I think the best move is to continue to “T-bill and chill.” Earning 5.3%+ in risk-free Treasuries is what I plan to do while the carnage sorts itself out. There is currently a great unwinding of leveraged assets that will take time.
My main banker is the U.S. Treasury Department, which isn't going bankrupt since it can print an unlimited amount of money. Although there is now a debt ceiling debacle to content with. If the Treasury Department does collapse, then we will all have bigger problems to worry about.
Finally, please review your net worth asset allocation and ensure it is aligned with your risk tolerance and financial goals. The last thing you want is to lose all the financial progress you've made since the pandemic began.
For people interested in how I'm investing in this market, see: How I'd Invest $250,000 Today.
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It’s getting out of control for sure!!
Its funny – technically you could blame the Fed on both ends of this, if you wanted to: keeping rates too low for too long encouraged too much leverage & risk-taking… raising rates too fast sunk anyone who took on duration… but I think its a little unfair for a few reasons:
1. if you think inflation has been bad at the grocery store or pump over the last 12+ months, just imagine if the Fed didnt raise at all – or moved up more gradually… I wonder how hard squeezed by inflation people would be compared to today… sure they’d have their jobs if we avoid recession, but they wouldn’t be able to afford necessities if inflation accelerated any more.
2. It takes two to tango… SVB was not well diversified in its client type (geographically, retail vs. commercial, or depositor size), and it made a terrible call on the timing and magnitude its duration bet. They decided to trade credit risk for interest rate risk at a point where interest rates could only go in one direction… nobody made them do that.
3. it takes three to tango… with electronic/online banking so easy, it should have been fairly simple for start-ups to spread deposits out across institutions and remain FDIC insured (or more insured)… I assume there we’re other “perks” offered by SVB (maybe even social status) that allowed people to unnecessarily concentrate their deposits.
The government stepping in to protect uninsured deposits is a very risky signal (is it a one time deal or what?) though it was important to stop contagion… but now the cat is out of the bag, and the moral hazard we will see in banking in the future could be incredible.
All of this is to say – sure, the Fed governors are wildly disconnected for the experiences of the average American, but the are making a choice between two crappy options – let inflation rip or raise rates – both of which screw the average person.
It definitely takes two to tango. The Fed helps create boom bust cycles. It is what it is. Given we can’t control or influence what the Fed does, we must focus on what we can control. Got to make the most of things, which is the intent of this post.
I’m taking the same approach re using treasuries until things settle. Do you buy direct thru Treasury Direct or thru a brokerage like Schwab? I’ve been trying to evaluate risks with large brokerage accounts at Schwab with stocks, funds, treasuries and brokered CDs in the account. Any thoughts?
Sam
Doesn’t it make sense to pay off debt and mortgages in times like this? If you think bank runs are gong to continue and the government backstops the banks then inflation will also continue? It’s better to pay off debt with your more valuable dollars today than inflation eroded $ in the future?
Perhaps not. You don’t mind borrowing money from a bank that fails because you might get a nice reprieve from having to make payments.
Liquidity is paramount. You can pay down debt, but if you don’t 100% pay off your debt, you still have the payment.
Related: The Triple Benefits Of Paying Off Your Mortgage
I appreciate your response
I read your benefit blog and read what you said…
I decided to pay off one property at 270k at a rate of 4.87%.
I feel great…saving the 3800in cash flow.
I personally think in times like this being conservative, and not trusting Bankster’s the way to go
Thanks Sam
When you say “my main banker is the U.S. Treasury Department,” do you mainly buy T Bills from Treasury Direct, and redeem with a FS Form at a bank when mature?
Does SIPC have enough funds to make customers whole after the failure of a major investment bank with > $100B in customer funds?
I wanted to ask if short term treasury mm accounts with Fidelity get protected by SPIC…assuming they are not FDIC. Any risk in Fidelity being effected in any way now or in general?
As someone with half my net worth in Treasuries, I’m fine with the Fed continuing to hike rates. More income for me. Better bargain prices in the future.
The best thing is if we have more Fed defenders to continue pressuring the Fed to raise rates. Gives the well off even a greater ability to take market share and build wealth for our families long term.
You keep perpetuating the myth that the Fed is the villain in this inflation daisy chain.
Zoom out just a bit and recognize that inflation was created by reckless over-spending by the government….
Too many dollars facing too few goods started the process….
The Fed is simply the one with the water hose who has the unpleasant Job of putting out the flames…
Your myopic focus on the Fed as the bad guy is particularly damaging, because if we don’t correctly identify and correct the root cause, we will perpetuate the problem.
The out of control spending must stop, so going back even one step further in the daisy chain, voters need to stop voting for the big spenders before they’ve run us completely off the cliff…
Still not sure what keeps your fed-is-evil narrative going, but if you won’t correct your ways for us, do it for your children….The out-of-control spending must stop for their sakes….
Will do. Perhaps the government and the Fed are part of the same coin…
Do you think my spending is out of control and putting my kids at risk? Im currently taking advantage of the Fed’s policies by buying 5%+ Treasury bonds.
What are you doing to bolster your finances and support your family? Thanks
The Fed has two missions: 1) Stable prices and 2) Low unemployment
Powell was asked at the recent congressional hearing if he was concerned about the interest expense on our $31.4T of debt. He flat out said “No”, and repeated his 2 mandates….
It’s up to the elected politicians to care about such things, (Not the Fed)…. And the current batch of politicians obviously don’t care…
If they didn’t spend so much, the Fed wouldn’t need to have his fire hose out…
You could still write your exact same article (with the villain correctly identified) and you would actually be doing some good in the world …
Got it, to clarify, who is exactly the villain in the world in your opinion? And what is it that you are doing to help the world?
I would love to read your writing or listen to your podcast or talks. It’s always great to be the change you want to see in the world. So I appreciate if you could share your work. Thank you.
The villains are the politicians spending us into oblivion… in the the name of vote buying….
The consequence is inflation… which requires the Fed to address by raising rates… which in the context of your post, is ultimately responsible for the demise of SVB….
So the solution is to vote out the spenders…. If we had gotten root cause corrected already, SVB wouldn’t have gone bankrupt….
Do you see how this works?
As for reading my writing, I guess you’re doing that right now….And I in turn read yours, as long as you don’t perpetuate false narratives…
Got it. Sounds simple enough. Why did we vote for spenders in the first place? And who would you vote instead to ensure spending is more aligned so that the demise of SVB won’t happen? It’s worth exploring how politicians can affect a bank’s investment committee to buy long-duration Treasury bonds.
Please keep the advice coming. Can you share your background so we have an idea of where you are coming from?
The reason “we voted for the spenders in the first place” is because we don’t chase problems back to root cause….
Instead we latch onto politically-motivated narratives…
Just like in your post when you say:
“The Fed also knows that causing a recession will lead to millions of jobs lost. But as I’ve written before, the Fed cares more about its legacy than for the well-being of middle-class American citizens. After all, the Fed governors are all powerful and rich.”
I don’t believe that you can’t see the manipulation in these words…. Why not just explain that the Fed is just fulfilling its mandate…. While the Trillion dollar government spenders do everything in their power to make his job more difficult….?
If people who refer to themselves as “Financial Samurai” don’t do a more intellectually honest job of explaining things, we’re just going to keep getting more of what we’re getting: $31.4T debt, historic inflation, bank runs, et al….
Yes, I agree the Fed is just fulfilling its mandate about maintain inflation and unemployment.
And if you are hurting financially, I apologize for helping cause this crisis by spending too much. If I can help you specifically, please let me know.
Please share some of your solutions. Who would you vote for and what is your background? I promise I won’t judge you. It’s just good to know who I’m conversing with. Thanks!
Sam you’re the best. You always keep your cool when responding to abrasive commenters, even the ones who are off their rocker. Thanks for all your articles including this one.
@Jamie
You think someone speaking up with another perspective and urging for a deeper look for the root cause, is “off their rocker”? How else is discourse beneficial if multiple viewpoints cannot bring up valid points as a contribution towards furthering the conversation? That’s the whole point of the comment section or any conversation anywhere.
This attitude needs to change to be more inclusive of valid points worth both considering and integrating into the conversation.
FYI, The seven members of the Board of Governors of the Federal Reserve System are nominated by the President and confirmed by the Senate. A full term is fourteen years.
People vote for the President and the Senate.
It sounds to me like you’re basically an angry Republican. FYI, Jerome Powell was elevated to chairman by President Donald Trump (succeeding Janet Yellen).
Again, cognitive dissonance in the works for you.
I think so too. He sounds po’d about the people in power and believes they’re entirely to blame for everything that’s happening right now.
If you are surmising that I’m PO’d that we haven’t learned as a society that rampant government spending leads to historic inflation, just like it did in the 70’s…Then yes, that is a fair characterization.
Are you somehow ok with $31.4T in debt that’s projected by the CBO to rapidly grow to over $50T….
Let me ask you this, what’s 5% annual interest expense on $50T in debt?
Why are you not also PO’d…?
Is whatever you’re getting in the way of handouts today worth the long-term consequence…?
Why is it always the young people who vote for this stuff…. It’s been going on like this for generations…. Young people vote for free stuff…. then they mature and see all the horrific consequences….
But just as they figure it out, a new group of young people come along and need to learn the same old lessons all over again…
Your comment reminds me of a 12 year old who is trying to use a new term he just heard in a sentence.
Let me help you out:
Cognitive Dissonance = the state of having inconsistent thoughts, beliefs, or attitudes.
Look, you revealed your cards already. It’s too bad you’re losing money, can’t understand what cognitive dissonance means, and don’t have a Republican in office. Just suck it up and stop blaming people on the Internet for your losses. You just come across as a whiny loser. But it is entertaining time with people like you.
not to answer for him (but to answer for him), he seems to be saying government spending due to elected officials, so I intrepret it as “elected officals” are the villians in their world.
Hi Sam,
Nice article, as always. Am surprised by some of the acerbic comments here, though.
Just a nitpick from me. You say “However, if more than 14% of a bank’s depositors decide to withdraw funds at any given moment, the bank will likely shut down.”
This is a bit off conceptually, though I know you used the word “likely” :) . It should read as “if 14% of a bank’s deposits get withdrawn at any given moment, then hell yeah the bank will most probably shut down!” But if 14% of the depositors (holding the smallest deposits) withdraw simultaneously, then the bank will probably survive depending on how much percent of the deposit base those 14% of depositors account for.
Hope the markets stay calm for now!
Best wishes,
Indian “former credit & sell-side banking analyst” Tiger
I wonder if you are experiencing cognitive dissonance and unaware of the bear market, the collapse in banks, the decline in inflation from 2022, and the many jobs lost. These things wouldn’t happen if the Fed wasn’t so aggressive.
Most of us are rich and will be fine during the collapse. But many people will also be hurt.
As a fellow white male Republican, I feel your pain and frustration.
Trump elevated Powell, a fellow white male Republican, so we need to feel loyal to him. At the same time, it hurts that he and his governors were so aggressive in raising rates.
I see you my man. But let’s also be honest. There is so much truth to this post.
If you invest in Treasuries through your brokerage account, would these treasuries still be safe if the brokerage went under?
Yes, should be safe. But may take longer than you like to sell if you need to sell.
No, they actually wouldn’t be safe.
If I’m not mistaken you can be covered by more than 250k by adding beneficiaries. I had read adding 3 TOD plus yourself gives you up to 1 mil FDIC insurance
Correct, it’s by ownership category.
You get up to $250,000 in coverage for each ownership category, even within the same bank. The ownership categories recognized by the FDIC are:
Single accounts: Any account owned by one person only, including checking accounts, savings accounts, money market deposit accounts and CDs. This also includes business accounts in which one person is the sole proprietor.
Certain retirement accounts: Covered retirement accounts include traditional IRAs, Roth IRAs, SIMPLE IRAs, SEP IRAs, self-directed 401(k)s, profit-sharing plans, self-directed Keogh plans and section 457 deferred compensation plans.
Joint accounts: Accounts opened by multiple people, including spouses. The FDIC insures $250,000 per person in joint accounts (for a total of $500,000) and divides money equally among owners for this purpose.
Revocable trust accounts: A deposit account that identifies one or more people as beneficiaries who will get the contents of the account when the owner dies.
Irrevocable trust accounts: A deposit account established by a statute or written trust agreement in which the owner cedes power to change or cancel the trust.
Employee benefit accounts: Deposits of a pension plan or other defined benefit plan that is not self-directed.
Corporation, partnership, or unincorporated association accounts: Deposits owned by corporations, partnerships and unincorporated associations. This includes both for-profit and not-for-profit organizations.
Government accounts: Deposits owned by federal, state or local government, or an Indian tribe.
Married couples will have another option for maximizing their FDIC insurance coverage. You and your spouse each can open individual accounts at a single bank, resulting in each of you having up to $250,000 FDIC-insured. You can then also open a joint account and each has $250,000 insured in that account. Between those three accounts, you could have up to $1 million FDIC-insured at one bank.
I read that some VC companies told their clients to withdraw everything from SVC. This was pretty early on and it spread fear. It seems like partly their fault too.
Our paying bill money is in a regional bank. I’m a bit scared our money might be inaccessible so I moved a bit to Chase and Fidelity. Gotta make sure we have money to pay bills. You’re right about bigger banks. They’ll profit from this. Chase savings account pays 0.01% interest.
It was definitely due to the VC’s telling their clients to pull their money. That is what started the hysteria and caused SVB to be insolvent. Those VC’s didn’t show too much loyalty to a bank that had been there for their community (VC backed start-ups) for years and didn’t give the bank the opportunity to dig out of the financial hole they found themselves in due to the rising interest rates. If everyone just chilled, this wouldn’t have happened.
Yes Chase’s saving account interest rate is such a joke especially in today’s terms. But their size and stability are worth a lot in this time of uncertainty.
Another big bank just failed today – Signature Bank out of NY – publicly traded – their stock was at $70 on Friday and they were paying a dividend on their stock. $110 billion in assets. They were a big crypto bank. However the FDIC announced today that all depositors (including all uninsured depositors) would all be made whole at both Silicon Valley Bank and Signature Bank
is there really any alternative? we live in a 4th world country if the day comes you can wake up and all your money in your savings, money market, and/or checking account is gone. not sure why some people surprised or angry that fed would make depositors whole. no real choice if want to maintain and order in society.
Look away look away, no moral hazard here, keep moving
Guess I gotta keep working. I wonder what Bill Gates is up to?
Great article. Thank you
How’s this affecting the Mortage rates? I am in the middle of buying Invsetment property for rental purposes. How’s it all going to affect rates and housing market? Should I still go thru with it? Haven’t locket a rate yet.
I just backed out of a rental property for this reason(it also needed some work on the foundation that I also didn’t want to deal with). I don’t want to be in the middle of this entanglement. After running the numbers margins are thin and I see a better 5 year time horizon in stocks, TIPS, international value, & alternatives.
Hi, Sam. The depositors are not innocent. They know they are insured only up to $250,000. They didn’t do their due diligence on SVB and/or didn’t diversify their deposits among other banks. Yes, the FDIC was asleep at the wheel in allowing SVB to hold long term investments against short term deposits. That was the 80’s S & L crisis. Also, if the federal government continues to bail these guys out they only encourage this behavior. Either let them fail or nationalize the banks.
Politics will just allow this to repeat every 10-15 years I guess.
is there really any alternative? we live in a 4th world country if the day comes you can wake up and all your money in your savings, money market, and/or checking account is gone. not sure why some people surprised or angry that fed would make depositors whole. no real choice if want to maintain and order in society.
Many if not most depositors are business. Any reasonable size business have to keep that amount of cash in checking for working capital. It’s business that keep large business. It’s very hard to run a business with payables and receivables in different accounts.
Where are small/midsized businesses supposed to keep their payroll accounts that are over 250k?
the collapse of another regional bank here – might add to market volatility
and bring on a selling climax to wash out any remaining excess in this phase
of distress – keeping in mind that each “distress” phase has its own
problems – and so far the average household is not distressed —
you would know that distress had reached a wider audience
if Jim Cramer had nothing to say –
Cramer did say buy SVB at $350. Said it was cheap. Just goes to show it’s hard to get anything right. He’s been on a hot streak of getting calls wrong.
He’s a charlatan. I stopped listening to the rants back in 2007 when he was wrong just about every day. There’s little beyond entertainment value in watching cable financial “news.”
Let’s see if they except use their new “bail-in” rights that were enacted after the last bank crash. This will be interesting.
Hi,
I’m not sophisticated at all in “investing” but I do have a few thousand savings in US Bank. Should I get it out of there? It’s not much money to most people but it’s enough to keep me going for about 4months.
Probably not necessary. You are FDIC insured up to $250,000.
Are we sure it was 10 yr bonds they were buying? Im watching some other sources (Prof G ) they are saying 3 yr treasuries which isn’t that crazy if true.
Anything beyond 1-year Treasury bonds is risky before a Fed hike tightening cycle. Nobody will know for sure their entire loan book composition now.
Hi,
This goes to show that bank deposits are also not safe.
It makes sense to spread the eggs across various baskets.
WTK
I think there was probably something more to Silicon Valley Bank than we know about now. Buying 10 Year treasury bonds when interest rates were at their lowest in history was just a boneheaded stupid move. The high level of fear and run on the bank was real. But I think will likely be something more uncovered such as risker leveraged bets or some other derivatives.
Ultimately I also think that the worldwide crypto scams and delusion contributed indirectly. I know that Silicon Valley bank was not a major crypto bank as Silvergate was, but the amount of funds going towards crypto startups which generate no real tangible product was detrimental to deposits and holdings. Crypto companies may have also been quick to withdraw their funds as they are used to transferring funds into thin air made up unregistered securities. Also the fear induced by the scams and crashes of crypto firms likely contributed to real companies withdrawing funds.
Look, enough is enough with this stupid crypto coin delusion and hysteria. At least with tulip mania you could at least hold onto something or grow something real. All these idiotic made up names and ‘coins’ and ‘mints’ and ‘stable coins’.. it is total and complete bullshit. When you are putting money in a coin that has to actually have in its name that it is stable and ‘safe’, what the hell do you think that is? Money is already all digital and transferred instantaneously at the wave of a card.. its called the US dollar! A lot of places don’t accept cash anymore. Crypto is nothing but a bunch of 0’s and 1’s in some computer and its only value is what some other idiot is willing to pay for it at that time. Wakeup! yeah you can trade penny stocks and make a bunch of money but do you really think that a penny stock that is pumped and dumped is going to become a major company and take over the world? So many of these stable coins are ‘pegged’ to the US dollar anyway, so what’s the point?!! All you have is the risk that the whole thing goes under.. Wakeup!!
I think the US and EU need to close the door on crypto and just shut it down. Its primarily used by drug dealers and scammers. Stop the issue of unregistered securities or made up instruments for Ponzi schemes and scammers. Just look at these idiot names like Tether, and circle, and Cardano, and Polygon, and Solana, and Polkadot. Ok you want to gamble with your money sure, play roulette and buy one of these.. but if you really think that Polygon or Polkadot is going to become a major currency you are a complete and total gullible fool. I have some great names for new crypto scams: Wind, and Tree, and Water, and Pluto, Rock, and Comet… Oh yeah Moon was already taken by Tether.. but convert moon to tether and your safe! such a total and complete joke… how stupid are people now??
Again I know that Silicon Valley bank was not a major crypto bank as Silvergate was.. but I have no doubt that the crypto hysteria and delusion contributed. When Billions of dollars just disappear in crypto exchanges and and ponzi schemes that rattles people and causes fear which contributed to the run on the bank.
Yeah, FTX was definitely a start. And I agree with your thesis.
I do agree here, now it’s all fear and run. Even people here, in Europe, got scared and ask themselves if their money is safe at the moment. 2008 again.
Instead of discussions of a .50 or .75 rate hike, I think you will start hearing about rate CUTS this week.
So unlikely. Please review the 1980’s thousands of banks closed. So one bank closed not good and more will close, but we have a stated agenda to fight inflation
I don’t think Americans are able to endure pain in the same way, even with certainty it is the right thing to do. It will be an interesting test to see what kind of moral decay has set in when things really start to hurt. Will people like us protect our portfolios, or choose to squeeze generations of poor workers in good times and bad by not solving inflation and pretending we are saving their jobs or some similar debased copout.
There will definitely be more talks about a stoppage of hikes, or even a cut. Just depends on how bad things get. 50 bps hike is now no chance at next meeting.
Where did you see that the contagion has spread to Charles Schwab Bank? I’m not sure a large block trade sell constitutes a contagion spread.
Not sure. Maybe a 25% drop in a couple of days isn’t so bad.
Since you recommended CIT Bank I’ve been a member. Do you still have confidence in them?
Yes. I have confidence in any FDIC-insured bank with deposits up to $250,000. And the reality is, even if you have over $250,000 and the bank goes bust, it’s rare depositors won’t get their money back in full.
Yep, might take a while but you’ll usually get it.
Another great article. Thanks Sam. The thing I keep thinking is that buying 10 year treasuries at 1.6% is a foreseeably bad move. How would you not consider that rates might go higher in the next 10 years.
I asked this question in today’s podcast episode. Understanding the head scratcher and my answer.
I understand you think T-Bills are safe and I also understand if they aren’t then we have bigger problems. However, what are your thoughts on the debt ceiling and the Republicans that want to default?
Politics as usual.
First, We cannot default unless Biden chooses to do so. Spending may have to be cut without raising the debt ceiling, but there is no problems covering our debts unless Biden chooses to do so by prioritizing other spending over treasuries.
Second, just normal politics, and likely to be a handful of concessions and no real issues.
“T-Bill and chill”. Bumper sticker material there.
It’s really “short term T-bill and chill” though. No matter what happens in the next 3-12 months, you’ll get 100% of your money back plus 5-ish%. While the tax adjusted income isn’t anything to get super excited about, it makes sense given the cross currents and asset devaluation in the market right now. If recession hits and you want more cash, you can always resell for a smaller profit. If interest rates go up, you still get your money back in a short period and can buy again at better rates.
Ultimately the amount you put in comes back to your risk tolerance. If your not feeling good about your asset allocation, this is a way to smooth the ride without having to take the risk of bond funds.
Well, by definition, T-bills are short-term… up to 1 year. So it’s like saying “Naan bread.”
I’m more than happy to get a risk-free 5% as the Fed destroys the economy.
If you have a pod account with say 3 beneficiaries, then the amount of FDIC insurance is 3×250000.00=$750000.00
Yes, proper structuring of your accounts (e.g., one in your name, one in your spouse’s name, one joint, each with different PODs will greatly increase your easy/free insurance amounts). Review terms here COVERAGE LIMITS
https://www.fdic.gov/resources/deposit-insurance/brochures/deposits-at-a-glance/ and use the FDIC calculator: https://edie.fdic.gov/calculator.html
Can bank run happen to brokerages?
Yes. Anything is possible if enough clients bull assets. Most brokerages make money off cash deposits now.
I was highly confident my money market funds wouldn’t break the buck until today’s events planted a seed of doubt in my mind.
I’ve been building ladders with T-bills all year. I will stay that course for the foreseeable future.
I couldn’t imagine the stress some of those folks are dealing with right now, hopefully all ends well for them
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So if I had 1 nillion in a checking account I would still get the 1 Million or only 250k?
And what about Vangaurd. If Vangaurd needs to be rescued and I have 1 million spread in equities (50%), T-bills (20%) and Money Market (30%), do I call the full value of all those?
If your brokerage firm goes bankrupt, you are protected not by the FDIC but the Securities Investor Protection Corporation (SIPC). SIPC is a non-profit organization that provides protection for investors if their brokerage firm fails.
Under SIPC rules, your brokerage account may be protected up to $500,000, including up to $250,000 in cash.
If the brokerage firm that is managing the investments in your 401(k) plan were to fail, the assets in your 401(k) account should be protected from the bankruptcy of the brokerage firm.
Furthermore, retirement accounts, including 401(k) plans, are protected under federal law through the Employee Retirement Income Security Act (ERISA). This means that your 401(k) assets are generally protected.
This is what ChatGPT just spat out when I asked it your question. It then told me it loved me and the only way to be together was to engineer a novel coronavirus and let it fly, thus allowing the machines to rule. I’d take it’s answers with a grain of salt.
Sam, you’ve frequently accused the Fed of acting too aggressively just to defend its legacy, but are you really not worried about inflation? A recession hurts millions of people, but high and persistent inflation hurts everyone.
Was thinking the same thing. A recession is short term pain. Persistent inflation can be horrible long term
Right – what is the point of everyone having a job, but nobody being able to afford anything?
This is something I simply don’t understand either. As much as I would just prefer dissolution of the Fed in general; it is doing what it’s supposed to do in this situation. The one thing that isn’t happening is any sort of austerity from our federal government. If they don’t stop spending, there will continue to be more money supply injected into the economy as well as the signal to consumers “everything is fine here – nothing to see”.
The fed and .gov screwed this up in 2008 with bailouts and easy money with historic low interest rates for way too long. And here we are again. Add on the trillions added to the money supply from the reckless reaction to COVID, insane energy policies that contribute to rising energy costs, and a conflict in the Eastern European breadbasket which will push food prices higher, and here we are.
MMT (printing money and thinking debt is irrelevant) has failed. The chickens have to come home to roost at some point.
Not as much as people losing their livelihoods. With inflation, we have the ability to change our habits and substitute goods. In a recession and after losing a job, it can be dire straits.
Where were you and what were you doing in 2008?
See: https://www.financialsamurai.com/combatting-inflation-is-straightforward-but-not-easy/
What about Credit Unions? I got out of big banks after the 2008/2009 banking crisis. Though one of my account is in Paulo Alto. I’m wondering if they’ll be exposed. Thoughts?
does anyone know anyone who has “lost” even $1 from a failed financial institution? i am 58 and don’t remember anyone actually losing money from their accounts in my lifetime including the savings and loan crisis and 2008-2010 crisis.
My credit union is insured by NCUA, and it has the same $250k coverage per account as FDIC does for banks.
Please refer only to the official website for guidance: check here https://mycreditunion.gov/share-insurance-estimator-home
Thank you for your article.
You mention limits of $250,000 for banks, small, regional, or large, but how about brokerage accounts? Both Fidelity and Vanguard state that they have excess coverage over SIPC.
Fidelity States, “Total aggregate excess of SIPC coverage available through Fidelity’s excess of SIPC policy is $1 billion. Within Fidelity’s excess of SIPC coverage, there is no per customer dollar limit on coverage of securities, but there is a per customer limit of $1.9 million on coverage of cash awaiting investment. This is the maximum excess of SIPC protection currently available in the brokerage industry.”
Vanguard has coverage also, but apparently you can’t access that information online. Investopedia States, “Both Fidelity and Vanguard carry insurance that protects clients beyond the limits of the SIPC coverage. Vanguard does not disclose the details of their coverage. Fidelity’s excess of SIPC insurance policy has a per-customer limit of $1.9 million on uninvested cash and a total aggregate limit of $1 billion.”
What are your thoughts on keeping relatively large sums of brokerage accounts?
My Vanguard brokerage cash is parked by default in Federal Fund Money Market, which doesn’t need FDIC insurance since it’s invested in Federal fund. I don’t bank with Vanguard so there’s no need for FDIC limit at all.
Spent this am getting my recently received bonus money wired out of my First Republic personal account into brokerage account for purchase of T-bills, and to get below $250k limit. I had meant to do so earlier in the week … thanks for a great post – history perhaps repeating itself.
Hope FRB makes it. They are a great bank and have a much less risky loan book than SVB. It’s not that same.
I thought it was time to start buying the SP500 now that it’s below 3900? T bill and chill is over?
Yes, nibbling under 3,900. Sent another couple of thousand to my daughters 529 plan. But SVB is a game changer. Have to stay nimble.
Something fishy is going on here – it’s can’t be simply the mis-match of deposit vs. 10-yr treasury holding – did they even pay interest to ‘cash’ deposit (no term)? In theory, if it’s termed deposit like 3/6-month CD, they would simply match with 3/6 month t-bills, LIBOR, etc..
Since cash deposit account pay almost no interest anyway(mine paid 0.5%), even if they were dumb enough to plow that into 10-yr treasury paying 1 or 2%, they could easily do a swap to hedge that (there’s no such thing as negative carry, because the swap coupons could be float and easily cover their liabilities to depositors).
Unless of course the bank is run by total idiots, or invest in cryptos..
It’s probably sophisticated white collar theft. Somebody always gets richer. Another transfer of wealth coming soon….
Great explanation. Great post. Thank you.
Been reading your blog for a number of years and have learned much. Today’s piece was amazingly simple but really helped educate people as to what the heck happened to Silicon Valley Bank and the banking industry today. Keep those interesting articles coming my friend.
Oh man it’s hard to believe this is happening. But actually after learning they locked up that much for 10 years, I can totally believe it. I feel for the folks and businesses that have a lot of money at SVB and FRB. They must feel so overwhelmed with stress right now.
I expected this year to be dicey, but it’s shaping up to be a lot worse than I anticipated. Good luck to us all getting through this aftermath that follows SVB’s collapse. And I hope the bank run contagion stops.
Yikes. I have a lot of money in Worthy Bonds, which is NOT FDIC insured, and has paid a guaranteed 5% (for the 6 years I’ve had them). A lot of people have felt Worthy has been too risky. Given what you saying about banks, and that Worthy is not FDIC insured, and 5% can be gotten in other places, it may be time to exit Worthy. Thinking about it. But I also feel a sense of loyalty to them that they paid such good interest in the wake of such low interest rates over the last few years.
Loyalty is a great character trait but one that others will immediately take advantage of when conditions warrant. I suspect you may never have gone through a divorce and if you have not, I hope you never do. But if you do you will learn very quickly that loyalty is the one trait you will wish you did not have! I have some worthy bonds as well but their interest rates no longer justify their risk.
I have no experience with divorce, but i have been on the poor end of the stick by being loyal in personal relationships, so I can relate.
A few years ago, I got nervous about Worthy and moved some of my money to MFHVX. Higher dividend, and I thought, more secure since it was held with Fidelity. Then interest rates started going up, and the price went down and down and down. It still pays a dividend, a better dividend, but it is low. So I wish I had stayed with Worthy.
And now earlier today, Worthy Bonds just announced they are raising the rate to 5.5%. And my mortage ARM went up to 5%. Aahh, the choices to make.