In the largest bank failure since Washington Mutual in 2008, regulators forced Silicon Valley Bank (SVB) to close on Monday, March 10, 2023. This collapse sent waves throughout the financial industry and left investors wondering if this could be the start of a more widespread economic disturbance. At Crash Proof Retirement, we understand that the issues faced by SVB are a symptom of the risky nature of securities-based investing.
Here is an analysis of the events that led up to SVB’s collapse and how they could impact investors in the future.
Why Did Silicon Valley Bank Collapse?
Thanks to a series of successful investments in tech industry startups, SVB was able to triple its deposits from 2020 to 2022, reaching a high of over $209 billion. While this would seem like good news for any bank, SVB made a crucial decision that marked the beginning of their demise: They invested heavily in 10-year treasury bonds. While treasury bonds are traditionally considered to be safe investments, some situations can result in big losses. A rapid rise in interest rates is one of them.
When the Federal Reserve hiked interest rates multiple times beginning in March of 2022, the value of SVB’s treasury bond holdings dropped rapidly compared to purchasing new bonds. When the bank’s depositors got wind of this, it spurred a bank run of a magnitude not seen since the Great Depression.
SVB customers pulled out some $41 billion in deposits in a single day, and with a large portion of the bank’s remaining capital tied up in treasury bonds for the next 10 years, they experienced a liquidity crisis that ultimately left them unable to meet their obligation to depositors.
The Aftermath of the Silicon Valley Bank Collapse
In order to contain the damage caused by SVB’s collapse, California state regulators seized the institution and appointed the Federal Deposit Insurance Corporation (FDIC) as a receiver. Treasury Secretary Janet Yellen and President Joe Biden assured investors and the nation as a whole that this move, unlike in previous bank collapses, would ensure that all SVB depositors would be able to recover their deposits without taking a dollar of taxpayer money.
Whether that ultimately turns out to be true remains to be seen, but at the moment, the FDIC is busy selling off SVB’s assets to cover the money owed to insured depositors. Of course, about 87% of SVB’s deposits were not insured; those depositors were issued a cash advance and receivership certificate, which could entitle them to dividend payments in the future. Again, the FDIC’s ability to meet these obligations remains uncertain.
SVB’s failure eroded investors’ faith in the banking industry as a whole. Some investors withdrew their money from other banks, parking it in investments they considered to be more secure. Ironically, treasury bonds were one of the more popular choices. A number of banks saw their share values slide in the week following SVB’s collapse as their depositors moved funds to larger banks they considered more reliable.
This led Yellen to announce, “There are recent developments that concern a few banks that I’m monitoring very carefully.”
This statement indicates that other banks could be at risk of failing. In the U.S., New York-based Signature Bank became the first to fail after SVB. In Switzerland, Credit Suisse received a $54 billion bailout before rival Union Bank of Switzerland agreed to purchase the company. More banks could follow suit in the coming weeks, fostering a lack of consumer confidence in the global banking industry.
This has drawn obvious comparisons to the period after the collapse of Bear Stearns and Lehman Brothers in 2008 that kicked off an extended recession. Back then, the FDIC closed 465 banks from 2008 to 2012 and investors lost untold billions in value from their portfolios. While the deal struck after SVB’s collapse is intended to avoid the kind of expensive taxpayer bailouts we saw after 2008, multiple bank collapses in a short period could necessitate using public funds to contain the financial fallout.
Is Your Money Safe in the Bank?
The chaos at SVB shows that parking your money in a bank account is not as safe as you might believe. If your bank goes under, the FDIC will cover your deposits up to a limit of $250,000. If you have more than that in your bank account, you could be left with a small fraction of your holdings. The deal between SVB and the FDIC guarantees all insured depositors will get their money back, but those who were not insured may never fully regain their funds.
SVB’s woes tell us that some investments that are traditionally considered safe – like treasury bonds – are actually subject to the same risks as other investments. As an investment based in the securities industry, just like stocks, mutual funds, and target-date funds, the value of bonds can fluctuate based on current economic conditions.
Speaking of economic conditions, SVB’s collapse sent bank share prices tumbling, and overall investor confidence took a hit. As more investors sell off their holdings, the stock market could see further declines that will negatively impact the value of any securities-based retirement investment. If the measures taken by the FDIC are not successful, the damage caused by SVB’s collapse could become even more widespread as time goes on.
Safe Investments in Uncertain Economic Times
If the SVB situation has left you feeling disillusioned with the banking system and securities-based investments, you are not alone. Many retirement investors will be seeking out safe alternatives, especially if more banks collapse in the coming months.
At Crash Proof Retirement, we have spent over a decade educating consumers about safe investments based in the financial life insurance industry. These Crash Proof Vehicles® are guaranteed to protect your principal no matter what happens with the stock market, and they can credit interest comparable to securities-based investments.
Investing your money with life insurance companies also provides a level of protection that can’t be found with any bank. Unlike banks, which generally go into default when they collapse, insurance companies go into receivership. This means that they must pay all their financial obligations before they are either conserved, rehabilitated, or liquidated. Regardless of which type of receivership is used, their investors and policyholders will not lose a penny.
If you are interested in finding out more about safe retirement investments, get in touch with the team at Crash Proof Retirement today. A licensed retirement educator will be happy to educate you about Crash Proof Vehicles® and help you develop a retirement plan that will protect you from stock market crashes and bank collapses. Call 1-800-722-9728 to set up your free financial checkup or fill out our online contact form.