Is your money safe at the bank?
Let’s talk about SVB: the second largest bank failure in US history.
One of my main goals in creating content is cutting through the noise.
So as far as SVB?
It’s a little bit of a mix of noise and importance.
The noise: what happened with SVB likely did not affect you.
The importance: understanding the safety of your money held at a bank and how to optimize for safety.
To understand what happened with SVB you first need to understand how banks make money.
Contrary to what movies and TV shows would have us believe, most money is not parked in a bank vault.
The bank would like to make money with your money, so typically they take your money and lend it out to other customers of the bank.
You deposit money at the bank and make 0.50%.
The bank takes that money and lends it out to someone and charges them an interest rate of 4.00%.
The difference is how the bank makes their money. In this case: 3.50%.
Now, what happened with SVB is unique because while there were a ton of deposits at the bank, there were not a lot of people wanting to borrow money.
This was unique to SVB because their client base was mainly tech companies.
And if you don’t know, tech companies typically don’t use a bank to raise money.
They have other means to get money: Venture Capital, Private Investors, Angel Investing, etc.
But SVB still wanted to make some money on these deposits.
So what did they decide to do?
They invested the money in treasury bonds.
Sounds pretty safe, right?
Well not exactly.
When the Fed decided to raise interest rates last year, this hurt the value of the bonds.
Bonds and interest rates have a seesaw relationship.
When interest rates rise, bond prices fall.
Now this is really not a big deal if you can hold the bond to maturity.
But the issue was customers of SVB started asking for their money back.
Venture capital funding started drying up last year so these tech companies needed their money to stay operational.
This forced SVB to sell these bonds before maturity and at a pretty steep loss.
The bank announced a capital raise to meet its customers obligations.
This spooked the customers of the bank and they started drawing money out of SVB.
This is what’s known as a “bank run”.
Eventually, SVB couldn’t keep up and folded.
What does this mean for the people who had their money at SVB bank?
The standard deposit coverage limit is $250,000 per depositor, per FDIC-insured bank, per ownership category.
But there are ways to increase this insurance limit:
For most of us, these coverage limits are more than enough.
But for SVB customers this was a problem.
Remember their customer base is tech companies? Some of these tech companies had millions at SVB.
To prevent panic and widespread bank runs, the government stepped in and decided to insure beyond the FDIC insurance limit and insure all of the deposits at the bank.
So how does all of this apply to you?
Just 2 key takeaways.
- Understand FDIC Insurance.
- Make sure the cash you have at the bank is not greater than the FDIC insurance coverage.
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