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The FDIC and Silicon Valley Bank

Posted on Friday, March 10, 2023

The second largest bank failure occurred around lunch time on March 10th. The firm announced (or miscommunicated in a horrific way) a loss on fixed income investments, venture capitalists made some calls, and the bank run began. There are lessons to be learned as the story unfolds, and it's an important time to review the role of the FDIC - an institution many know of, but never need to engage with.

Lesson number 1: Confidence and rhetoric are perhaps our most important tools, and those with wide platforms have a great responsibility to ensure balance. Should SVB have failed? Were they a sound business, just focused in one sector? If they never made a press release about selling some investments, would this have happened? The reality is, it doesn't matter anymore. In our view, SVB did some things wrong, but primarily did a poor job working with clients on insuring deposits. A staggering 92% of accounts had balances above the FDIC limit. This is not normal, and a key contributor to the psyche that led to run on the bank.

Lesson number 2: The FDIC acts very quickly. If a bank fails, insured deposits will be sent to customers within days, either via a bank account elsewhere, or check. The FDIC website even mentions the 'next business day'. If your account is below the FDIC limit, you should not panic and contribute to the herd. Check your account balances relative to the FDIC limit, and ask the question of your current institution - what percentage of your accounts and assets are FDIC insured? It's likely a very high percentage. SVB was an anomaly.

Lesson number 3: Cash may be king, but insured cash is the emperor. Rainy day, emergency cash is imperative to have on hand at the personal and business level, especially insured cash.

Lesson number 4: Mind the FDIC limits. It's very easy to manage your risk. Your cash deposits are insured $250,000 per depository institution for every account by the FDIC. If you have a business ($250,000) and an individual account ($250,000), you get $500,000 coverage. If you and your spouse have an individual account ($250,000), joint account ($500,000), and another individual account ($250,000), you get $1,000,000 in coverage. Spread that out at two banks, or include an FDIC cash management sleeve within your investment account (which we do), and you can multiply coverage and reduce risk further. Rinse and repeat until you can sleep at night. Although, if you have this much excess cash laying around, we should start with a different conversation...

Lesson number 5
: There are concepts in business and personal finance which we harp on daily. (1) Diversify your account types (2) Diversify your investments (3) Diversify your income streams. If your bank is doing these three things, which Silicon Valley was certainly not, and you are monitoring your cash relative to FDIC limits, you do not need to be a part of the herd. You've done what you need to.

FAQ Link on FDIC Website: click here

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