In Light of SVB Collapse, What Should Bank Depositors Do Now?
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The recent failure of Silicon Valley Bank momentarily threw the US financial system into a panic as the tech lender’s depositors – including many insurtechs and VC-backed start-ups – wondered whether they would be able to recover their deposits in excess of the $250,000 insured by the Federal Deposit Insurance Corporation (FDIC).
Assured by the federal government that they would be made whole, depositors and others in the financial sector heaved a sigh of relief, but not before bank stocks slid on Wall Street, with some banking institutions losing more than half their market cap in one day.
The collapse of Silicon Valley Bank, the 16th largest bank in the US with $210 billion in assets that served the technology industry for 40 years, was the biggest bank failure since 2008 and the second largest in US history. It was followed closely by the failure of Signature Bank in New York, a $107 billion institution that served cryptocurrency depositors, among other sectors. Though they occurred only two days apart, the two bank failures were unrelated, but they caused significant anxiety from top to bottom in the financial system.
To prevent further damage to the financial system, the Treasury, the Federal Reserve and the FDIC jointly announced on March 12 that FDIC would cover all deposits of Silicon Valley Bank, including those above $250,000. The FDIC is allowed to cover excess deposits if the Treasury Secretary and two-thirds of the FDIC and Fed boards determine there is a “systemic risk” to the financial system.
What Should Depositors Do Now?
If your company has deposited in Silicon Valley Bank, rest assured you will be able to recover the full amounts based on the actions of the US Government on Monday. For companies holding fixed-income securities, this is a good time to examine your investment policies and practices:
- Review your investment holdings – Is your asset allocation appropriate to a volatile economy with rapidly rising interest rates? That’s where we are now and where we may remain for a while. There will be a lot of discussion regarding duration risk, or the risk entities will be unable to hold fixed-income investments until maturity.
- Review your investment policies – What are your long-range policies? Do they call for a regular review of holdings or re-allocating investments as the economy changes? Do your policies speak to the issue of how much of your liquidity can be concentrated in one financial institution?
- Review your level of diversification – Re-allocation and diversification may help protect you in this economy.
- Consider your cash needs when you go into longer-term positions – Your investment policies should include benchmarks for maintaining a level of liquidity that will help you meet short-term needs.
We’re Here to Help
If you have questions or concerns about your company’s investment policies, or if you have deposits in Silicon Valley Bank you are concerned about, JLK Rosenberger can help. For additional information, call us at 818-334-8646, or click here to contact us. We look forward to speaking with you soon.
