Managing Your Cash - Optimizing Your Bank Deposits In Light Of Recent Bank Failures.

Managing Your Cash - Optimizing Your Bank Deposits In Light Of Recent Bank Failures.

May 11, 2023

When Silicon Valley Bank (SVB) failed in March, it grabbed a lot of news headlines and social media attention. Now, as the crisis at that bank (and a few others) fades into the background, many people are understandably still left wondering: Is my money safe where it is?

Transparency and useful information are two things everyone wants from their financial relationships. In this quick read, we'll explain a bit of what happened at SVB (as it relates to what caused the bank to fail) plus what GTS Financial clients need to know regarding the insurance that applies to their investment accounts. 

What happened at SVB?

The short story of what got SVB in trouble is related to the capital markets. SVB had a large holding in US government bonds ($117 billion at the end of 2022). Historically, a 10-year US bond has been one of the safest investments in the world. However, some of SVB’s bonds were purchased when interest rates were low a few years ago. As the Federal Reserve raised interest rates to fight inflation, the bonds SVB was holding became less valuable. Unique to SVB was the fact that its clients had made deposits at the bank that were well in excess of the amount that would be insured against loss if the bank failed. When SVB’s clients were made aware of the risk that the paper loss in bonds posed to the bank, many tried to withdraw their money fearing a loss on their uninsured deposits. As with any classic bank run, SVB didn’t have the liquidity to meet the withdrawal demands of its clients so the bank failed and was seized by federal authorities.

The question immediately became: Will this happen to other banks?

Federal Response

Normally, bank deposits are guaranteed for up to $250,000 per depositor and per insured bank according to Federal Deposit Insurance Corporation (FDIC) guidelines. However, the US government stepped in and guaranteed the deposits of SVB in full. It did this to try to avoid other bank runs and to support the tech companies and their employees that kept cash on deposit at SVB.

More to come?

It would not surprise us to see more regional bank failures in the near future as rising rates continue to put pressure on banks. Additionally, upcoming issues in the commercial real estate sector may impact banks who invest their deposits in those assets.

However, the bottom line for our clients is GTS Financial always recommends clients be aware of the FDIC insurance limits and ensure they stay below those. 

While it is concerning to see banks failing, from an investment standpoint, the long-term trend of the market perseveres as seen in the chart below. 

As always, if you have any questions around your finances, don't hesitate to reach out.