More people are wondering just how safe their money is in a bank after the collapse of Silicon Valley Bank and Signature Bank.
Online searches asking that question have jumped as Americans worry their bank could be the next to fail.
Experts say there’s no reason customers should worry about money kept in banks that are covered by the Federal Deposit Insurance Corporation, especially since very few depositors surpass the $250,000 limit on the insurance.
And with Signature and SVB, the government took extraordinary steps to insure deposits above that limit.
Clark Kendall, president and CEO of Kendall Capital, a wealth management firm, said the government’s actions set a precedent for any other bank failures. “The FDIC will now step up and ensure all depositors,” he thinks.
What caused the SVB collapse?
Silicon Valley Bank’s collapse was tied to faltering tech stocks and interest rate hikes by the Federal Reserve.
The bank’s customers – mostly startups and other tech companies – were in need of cash after venture capital funding started to decline. Those customers began withdrawing their SVB deposits to pay their expenses.
SVB didn’t anticipate so many withdrawals at the same time. And when that occurred, the bank was ill-prepared with minimal deposits on hand and most of its money tied up in U.S. Treasuries.
Normally, this is considered a safe long-term investment, but the Fed’s interest rate hikes made the value of the Treasuries tumble.
SVB had to start selling those bonds at a loss to meet withdrawal requests, but it wasn’t enough.
Last week, the bank said that it suffered a $1.8 billion after-tax loss and would sell $2.25 billion in new shares, which spooked investors. The bank’s stock plummeted and depositors moved to take out more money than the bank could provide. Two days later, regulators seized the bank’s assets.
How is this different from 2008 bank collapses?
While SVB’s meltdown and the stress rippling through the banking system may stir memories of the 2008 financial crisis, it has little in common with the earlier episode.
The 2008 crisis enveloped the entire housing market, threatened the survival of the nation’s biggest banks and threw the economy into its worst downturn since the Great Depression.
In the early 2000s, banks approved subprime mortgages for unqualified borrowers who couldn’t refinance or repay the loans when the housing bubble burst. As house prices fell further, the pain quickly spread to more traditional borrowers who defaulted on their mortgages and to banks that had bundled the mortgages into securities and sold them to other investment firms.
With the value of those securities plunging, banks virtually halted lending, millions of Americans lost their homes to foreclosure, nearly 9 million workers lost their jobs and nearly $20 trillion in household wealth was wiped out.
The current crisis began with a single regional bank that disproportionately served tech companies.
A second bank, Signature Bank, also had to shut down and the stress spread to other regional banks with concentrated portfolios. But it generally has not imperiled larger, more diversified banks, says Gregory Daco, chief economist of EY-Parthenon.
And while SVB had to cope with “interest rate risk,” which ultimately led to its demise, banks in 2008 faced “credit risk” – the more serious hazard of loan defaults, Daco says.
Another key difference is commercial banks have a far bigger capital cushion to withstand losses today, with cash comprising 14% of their assets, compared with 3% at the start of the financial crisis, says Jeffrey Roach, chief economist of LPL Financial.
The values of those assets, largely Treasury bonds, are known. That is unlike the underlying value of mortgage securities in 2008, Daco says.
And this time, regulators moved within two days to guarantee that deposit holders at SVB, Signature and other banks could access all their money, Daco says. In 2008, it took federal agencies months after the failure of Bear Stearns and IndyMac Bank to set up their most sweeping rescue programs.
Hundreds of banks failed in the 2008 crisis, versus two so far in the SVB episode. And the current crisis will cause banks to pull back on lending but not nearly as much as in 2008, economists say.
“Unlike in 2008, the government is getting ahead of the problem rather than trying to clean up afterward,” says Brad McMillan, chief investment officer of Commonwealth Financial Network. “We are not set for a rerun of the Great Financial Crisis.”
