SVB Failure Highlights Critical Need for Deposit Diversification

by | Mar 8, 2023 | Uncategorized

SVB Failure Highlights Critical Need for Deposit Diversification.

Do not wait another moment to protect your hard-earned money! The recent failure of SVB bank should serve as a wake-up call to all depositors. Did you know that over 95% of the accounts in SVB were NOT FDIC insured? This is unacceptable and should be a call to action for everyone!

In the US, bank accounts are insured up to $250,000 by FDIC. Ditto up to $100,000 CAD in Canada by CDIC. In Australia, it is $250,000 AUD. If it is a joint account, each person gets the $250,000 for a total of $500,000. They have no deposit insurance in New Zealand.

US FDIC Insurance

The basic idea of the US FDIC insurance is to get you to put your money in multiple banks. Diversification. There is no limit to how much total you and your family can protect. The limit is per bank.

We have FDIC (Federal Deposit Insurance Corporation) insurance to protect bank depositors in the event of bank failures or financial crises. This was established in 1933 during the Great Depression. During the time, many banks failed and depositors lost their savings because there was no protection for their deposits. The purpose was to prevent bank runs and restore public confidence by providing depositors with a guarantee that their deposits were safe. It accomplishes this by collecting insurance premiums from banks and using those funds to pay depositors in case of a bank failure. The FDIC also works with banks to identify and mitigate risks and promote sound banking practices.

For individuals having uninsured bank deposits above the $250,000 limit is nothing short of IDIOTIC! Do not put yourself and your family’s financial future at risk. My understanding is you can protect up to $1.25M per bank (your, hers, ours, and two trusts) for married couples. To get protection for FDIC insurance above the $1.25M, you would need to have accounts in multiple banks. (Chase, Bank of America, PNC, Huntington, Wells Fargo, etc.)

For corporations, which was the bulk of Silicon Valley Bank deposits, this is more difficult. They have to make payroll and have much larger transactions than normal small businesses or individuals. Fortunately for depositors of Silicon Valley Bank, it is forecasted that they should be getting something back above the $250K based on the sale of its assets. Whether or not they get the complete deposits versus a percentage remains to be seen. This is also seen as more of a regional risk with the bank versus a national risk. Regardless, corporations should hold deposits in multiple banks to eliminate concentration risk as lessons learned.

Firms affected by SVB failure

Some companies with exposure to Silicon Valley Bank:

  • Roku
  • CompScience
  • Ambarella (Semiconductor firm)
  • Roblox (Digital Gaming)
  • LendingClub
  • Sunnova and Sunrun (Solar)
  • Rocket Lab (Space)
  • Vimeo (Video)
  • Stem (AI Company)
  • Several pharmaceutical firms
  • Numerous cryptocurrency firms including BlockFi, Circle, Pantera, Avalanche, Yuga Labs, Proof, Nova Labs
  • Some Exchange trading funds

I want you to imagine that you are one of these companies for a second that did not contingency plan. You have to make payroll. You have bills coming in. Your employees and suppliers are relying on you to support their families and pay their bills. You’ve worked harder than you’ve ever worked before to obtain the cash that was in Silicon Valley Bank. And now, you have a massive amount of uncertainty and dread as to what’s going to happen, all because of a bank run. You are left holding the bag because you allowed concentration risk to occur, holding all of you funds in one bank, and also did not have a risk management team put together to find the headwinds of the financial stability and a bank run to occur.

You are the CEO, the head of household for your own family. Make sure you do the necessary risk assessment and actions so it is not you as the one left holding the bag.

The next financial collapse?

Some people are asking if this is the next financial collapse. I don’t believe it is but there could be additional ramifications. Anyone who is fundraising currently may need to take a time out, whether they want to or not, until the smoke clears. With companies not being able to make payroll, LP and VC money being caught in the mix, the possibility of a cascade to other banks and of bankruptcies on the horizon, vultures and sharks looking for deals on the sidelines, it seems like there will be a serious reshuffling of cards over the next few months. This would be on top of rising interest rates, unknown potential for recession, and impaired valuation multiples. VC money may dry out for existing start ups and many may not make ends meet. If any company, especially start ups, cannot make payroll they will either die or lose all momentum while their workforce walks. People (rightfully) will refuse to work for free who are already on the verge of losing everything. The ripple effect from this is likely to be significant. The state of California also has law about damages for withholding wages that is significant, basically a penalty of a days’ worth of wage for every working day late an employee is not paid for their wages for up to 30 days. The wage law also pierces the corporate veil so you can’t say screw it and close the corporation, you could be held personably liable for unpaid wages.

Bank Failures

Regardless it is good to know some of the history of other bank collapses. Here are other notable bank collapses below:

Lehman Brothers (2008) – Lehman Brothers was an investment bank that filed for bankruptcy in 2008, with assets of $691 billion. This was the largest bankruptcy filing in U.S. history and triggered the global financial crisis.

  • Washington Mutual (2008) – Washington Mutual was a savings and loan bank that failed in 2008 with assets of $327.9 billion. It was the largest bank failure in U.S. history until the collapse of Lehman Brothers a few months later.
  • IndyMac Bank (2008) – IndyMac Bank was a savings and loan bank that failed in 2008 with assets of $32 billion. It was the third largest bank failure in U.S. history at the time.
  • Continental Illinois National Bank and Trust (1984) – Continental Illinois was a commercial bank that failed in 1984 with assets of $40 billion. At the time, it was the largest bank failure in U.S. history.
  • Bank of Credit and Commerce International (1991) – BCCI was a global bank that failed in 1991 with assets of $20 billion. It was the largest bank failure in British history and one of the largest bank frauds in history.
  • Northern Rock (2007) – Northern Rock was a British bank that failed in 2007 with assets of £113 billion ($144 billion). It was the first British bank in 150 years to suffer a bank run.
  • Banca Monte dei Paschi di Siena (2017) – Banca Monte dei Paschi di Siena is the oldest bank in the world and one of Italy’s largest banks. It was founded in 1472 and failed in 2017, with assets of €169.4 billion ($199 billion). The bank was bailed out by the Italian government and is still operating today.
  • Dexia (2011) – Dexia was a Belgian-French bank that failed in 2011 with assets of €518 billion ($611 billion). The bank was bailed out by the governments of Belgium, France, and Luxembourg.
  • Wachovia Bank (2008) – Wachovia Bank was a commercial bank that failed in 2008 with assets of $309 billion. It was acquired by Wells Fargo.
  • Bankia (2012) – Bankia was a Spanish bank that failed in 2012 with assets of €312 billion ($367 billion). The bank was bailed out by the Spanish government and is still operating today.
  • Colonial Bank (2009) – Colonial Bank was a regional bank in the United States that failed in 2009 with assets of $25 billion. The bank was seized by the Federal Deposit Insurance Corporation (FDIC) and sold to BB&T Corporation.
  • Bank of America Illinois (1991) – Bank of America Illinois was a subsidiary of Bank of America that failed in 1991 with assets of $8 billion. The bank was seized by the FDIC and sold to First National Bank of Chicago.
  • Long-Term Credit Bank of Japan (1998) – The Long-Term Credit Bank of Japan was a Japanese bank that failed in 1998 with assets of ¥4.6 trillion ($42 billion). The bank was nationalized by the Japanese government and restructured as Shinsei Bank.
  • Barings Bank (1995) – Barings Bank was a British merchant bank that failed in 1995 due to unauthorized trading by one of its employees. The bank had assets of £20 billion ($27 billion) and was sold to ING Group.
  • Banco Espírito Santo (2014) – Banco Espírito Santo was a Portuguese bank that failed in 2014 with assets of €72 billion ($85 billion). The bank was split into two entities, Novo Banco and Banco Espírito Santo.
  • Kaupthing Bank (2008) – Kaupthing Bank was an Icelandic bank that failed in 2008 with assets of €23.5 billion ($27.6 billion). The bank’s collapse contributed to Iceland’s financial crisis and led to the country’s government taking control of the bank.
  • Banco Popular (2017) – Banco Popular was a Spanish bank that failed in 2017 with assets of €119 billion ($140 billion). The bank was acquired by Banco Santander for €1, and the acquisition was approved by the European Union.
  • Cyprus Popular Bank (2013) – Cyprus Popular Bank was a Cypriot bank that failed in 2013 with assets of €22 billion ($26 billion). The bank was nationalized by the Cypriot government and later restructured as the Cyprus Cooperative Bank.
  • Bradford & Bingley (2008) – Bradford & Bingley was a British bank that failed in 2008 with assets of £50 billion ($64 billion). The bank was nationalized by the British government and later sold to Santander.
  • Hypo Real Estate (2009) – Hypo Real Estate was a German bank that failed in 2009 with assets of €386 billion ($455 billion). The bank was nationalized by the German government and later restructured as Deutsche Pfandbriefbank.