Silicon Valley Bank is the second-biggest bank crash in U.S. history—here’s what it means for your money

FAN Editor

Late last week, Silicon Valley Bank disclosed signs of gross financial mismanagement, sparking panic among the bank’s investors and customers. By Friday, the bank, which caters to numerous startups, had halted trading on its plummeting stock, prompting a race among depositors to withdraw their money.

Regulators stepped in that day, shuttering SVB and seizing its deposits in the largest bank failure since the 2008 financial crisis and the second-largest in U.S. history.

Rumors swirled over the weekend about what this would mean for venture capitalists, for the tech industry, for startups and for bank customers nationwide.

By Sunday, the U.S. government provided some clarity, with regulators announcing that they’d fully cover deposits at SVB and Signature Bank (which also failed Friday after a bank run) while relying on Wall Street and financial institutions — not taxpayers — to foot the bill.

What does this mean for regular people? Well, you can stop replaying the events of the 2008 recession crisis in your head, says Brad McMillan, chief investment officer for Commonwealth Financial Network.

“We are not set for a rerun of the Great Financial Crisis. This is not the end of the world,” he wrote in Monday commentary.

Here’s how the SVB situation potentially affects your money.

Your bank accounts are likely safe

The institution that took control of SVB’s funds is the Federal Deposit Insurance Corporation, an independent federal agency that insures savings and checking accounts as well as money market accounts and certificates of deposit. In the case of the bailed-out banks, the FDIC is insuring all deposits, but under normal circumstances, deposits under $250,000 are generally covered.

“The vast majority of bank customers have cash balances that are below the FDIC insured amount,” says James Lee, a certified financial planner and president of Lee Investment Management in Saratoga Springs, New York. “Unless you have over $250,000 in a single institution, you should not be worried.”

If you have more than $250,000 in cash lying around in a single account, now may be time to think about diversifying, Lee says. The FDIC insures up to $250,000 per person, per bank and per account type, which means you can spread money around between accounts without exceeding the insured limit.

If you have a complicated tangle of joint and individual accounts, use the FDIC’s Electronic Deposit Insurance Estimator tool to get a better idea of whether or not you’re fully covered.

Make sure your portfolio is diversified

In a White House speech on Monday, President Joe Biden reassured small business and individual account holders at the failed banks that they’d be made whole. SVB and Signature Bank investors? Not so much.

“Investors in the banks will not be protected,” Biden said. “They knowingly took a risk, and when the risk didn’t pay off, the investors lose their money. That’s how capitalism works.”

The news of SVB’s and Signature’s demise has sent shockwaves through financial stocks. Shares of First Republic Bank, which investors worry will suffer a similar fate, lost 52% on Monday after shedding 33% last week. Regional banks, such as PacWest Bancorp and Western Alliance Bancorp, have fallen sharply.

It illustrates how an investment in a single company or industry can suffer dramatic, short-term losses that can be punishing for your portfolio, says Sam Stovall, chief investment strategist at CFRA. “It’s a reminder to ask yourself what kind of investor you are,” he says.

Short-term traders may be willing to make big bets and lose them, he says. But for long-term investors, building a broadly diversified portfolio can reduce the risk of a catastrophe among a handful of companies dragging your portfolio down.

“You probably should be focusing on diversifying among styles, regions, sizes and sectors,” Stovall says.

A second global financial crisis is unlikely

Investor panic amid bank failures should feel awfully familiar to those who remember the 2007-2009 financial crisis or viewers of “The Big Short.”

But while there was no shortage of Michael Burry memes floating around this weekend, financial pros don’t think the current crisis looks like the one they ended up making movies about.

That’s because the government has been proactive in protecting depositors in order to maintain consumer confidence in the banking system, effectively containing a lot of the would-be damage, says McMillan.

“Unlike in 2008, the government is getting ahead of the problem rather than trying to clean up afterward. That is a very positive sign,” he wrote.

Overall, banks have much healthier finances than they did in 2008, Brian Levitt, global market strategist at Invesco, wrote in a March 10 blog post.

Nevertheless, banks looking to batten down the hatches are likely to be more cautious in their lending, leading to a further slowing of the economy — one that could hasten a possible oncoming recession.

That makes now a good time to ensure you have adequate emergency savings and a robust financial plan in place. Having a stash of cash ensures that you won’t have to sell investments at a loss to cover unexpected expenses, such as those related to a job loss, says Lee.

Reaffirming your financial plan will help you stay disciplined in the event that markets decline further during an economic drawdown. Plans to consistently invest in the market and to regularly rebalance, for instance, ensure that investors buy more shares when investments are cheap and fewer when they’re more expensive.

“My advice is to stick to your long-term strategic asset allocation, regardless if we have a recession or markets are volatile going forward,” says Lee. “Make sure you’ll be able to meet your financial goals if you stick to that plan.”

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