After the collapse of Silicon Valley Bank, Signature Bank and the rescue of First Republic Bank, there are many questions about what happened and how you can protect yourself.
Q&A:
Why did Silicon Valley Bank Collapse?
There are several reasons. We all know that there was a run on the bank, but let’s dig a little deeper. SVB focused on technology start-ups, which have struggled recently and decreased deposit balances. A strong bank should have a diverse base of depositors and minimize a concentration of customers to reduce risk. The bank did not hedge its investments to offset its risk, even if the investments were considered low-risk, as the value of bonds will decline in value if interest rates rise. The prudent way for a bank to manage this risk is to purchase hedges, which protect against interest rate increases.
What happens to your deposits in a bank failure?
There is FDIC insurance, which covers up to $250,000 of a customer’s deposits. However, the Fed, has covered deposits that were larger than the maximum FDIC coverage. This may not be the case if your bank fails and your deposits exceed the FDIC limit.
How do I protect myself?
There are several ways if you have more than the FDIC limits. You can keep your deposits in several banks, perform research on the strength of your bank and customer concentration, and purchase short-term treasury bills directly from the Fed.
Will more banks fail?
If this is just the beginning of a financial collapse, then the answer is “yes.” According to the FDIC, during the Great Recession 3 banks failed during 2007, 25 banks failed during 2008, 140 during 2009, 157 during 2010, 92 during 2011, and so on. That’s 417 in total during those years. If the current bank failures were anomalies, then you have nothing to worry about. However, there seems to be a probability that does not favor that view., We will have to wait and see what unfolds.
Am I on the hook for bank bailouts?
No matter how you spin it, the taxpayer is on the hook for the bailouts. Virtually everything is funded by your taxes or your deposits.
Should banks be bailed out?
This is a hard one to answer, but here are a few basic pros and cons. The benefit is that you will not lose your deposits. The con is that it takes away accountability and responsibility from both the banks and the depositors. Yes, depositors need to also be prudent with where they keep their cash, which will help the banks to manage themselves better by attracting deposits when they are run better.
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