Sarah Edwards | May 05, 2023
Summary: News of the Silicon Valley Bank collapse in March 2023 shook the economy and made many people concerned about the security of their bank-held finances. SoloSuit explains what you need to know about the situation.
Silicon Valley Bank is known for servicing many tech companies. It specializes in helping tech startups and private equity firms with loans, banking services, and asset management. Individual consumers can also bank with Silicon Valley, and many tech industry employees and California residents have chosen to do so.
You might be unfamiliar with the bank if you don’t work in tech or don’t live in California. Silicon Valley Bank was the nation’s 16th-largest financial institution before its collapse on March 10, 2023. According to a Federal Reserve Board finding, the failure occurred due to mismanagement of liquidity and interest risks, along with weakened regulatory action by the Federal Reserve itself.
While Silicon Valley Bank is up and running again after being purchased by First Citizens Bank, you might wonder whether its failure could cause issues for customers of other banks. The good news is that you probably don’t need to worry about the security of your money if it’s in an FDIC-insured bank. Let’s review why.
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FDIC insurance is enough for the average consumer who has a checking or savings account with an FDIC-insured bank. This insurance protects up to $250,000 of an individual’s depository accounts in a single financial institution. Depository accounts include the following:
However, FDIC insurance will not protect investment accounts like mutual funds, annuities, stocks, bonds, or life insurance.
Each depository account is subject to the same $250,000 limit. Suppose that you have $250,000 in a checking account, $250,000 in savings, and $250,000 in CDs at the same bank, and the bank suddenly fails. The FDIC will refund you a maximum of $250,000. You could lose the remaining $500,000.
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The federal government has many regulations to ensure banks protect your money properly. Government officials know that bank failures can have an adverse economic and psychological impact on consumers and businesses, so it's in their best interests to monitor the banking system for problems.
Despite the federal government’s efforts, an average of 3.6 banks failed annually between 2015 and 2022. However, that’s a far cry from the height of bank failures during the Great Depression, when over 9,000 banks failed nationwide.
The FDIC doesn’t insure investment accounts. If a lot of your money is tied up in stocks and bonds, you’ll want to pay close attention to the stability of your banking institution. People with 401(k) retirement accounts and similar investments should be careful to safeguard their funds in reputable institutions, not fly-by-night companies they’re unfamiliar with.
If your depository accounts exceed $250,000 in a single bank, consider opening accounts at different banks to reduce the risk of losing money.
Let’s consider an example.
Example: Henry has $750,000 in a single checking account with Purple Bank. While Purple Bank is FDIC-insured, Henry knows he could lose $500,000 if the bank fails. He sees no signs that Purple Bank is failing but is very risk-averse. His grandfather lost his life savings during a Great Depression-era bank run, and he knows how much his family suffered during that period. Henry opens two new checking accounts at Blue Bank and Red Bank and deposits $250,000 in each. Now, all of Henry’s money is FDIC-insured. Even if all three banks fail, Henry will still recover his cash.
If you ever experience a bank failure that impacts your depository account, know that the FDIC will refund you typically within the next few days. It will either open a new account in a different bank and deposit your money or issue you a check.
While all Silicon Valley Bank account holders were made whole after the bank collapse, that isn’t always the case. Silicon Valley Bank found a buyer with First Citizens, so no account holders lost their money. However, if you have depository accounts worth more than $250,000, it may be worth spreading your money across several banks to mitigate your risks.
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