Bank Account Hygiene

The announcement today that the FDIC has become the receiver for Silicon Valley Bank is a useful reminder that significant bank failures occasionally do occur and that as depositors we all should pay mind to the $250,000 ceiling on FDIC insurance.

We recommend that clients keep each account below the insured ceiling at their banks and credit unions and note that while the ceiling applies to each account type separately (e.g. personal, joint and community property), the ceiling cannot be lifted using multiple accounts of the same type. A further detail: joint accounts are entitled to $500,000 of protection.

At Schwab, we seek to keep “sweep cash,” which is a deposit at FDIC-insured Schwab Bank, below the $250,000 ceiling per account type. Additional cash is typically held in a position-traded money market fund, which can be sold overnight and pays current yield of about 4.4% for taxable funds. From time to time, sweep cash for a client must be above the FDIC ceiling for the limited purpose of funding a transaction, like a home purchase, major tax payment or to make a significant private fund investment.

Thankfully, for SVB customers, the FDIC says they will give insured depositors access to their funds on Monday, so they are restricted only over the weekend. Even uninsured depositors seem likely to eventually recover close to all of their deposits in time based on published statistics about the bank’s financials.

How could SVB have failed so quickly? It had a very unique market position providing services to the Silicon Valley venture capital community and its portfolio companies. Those deposits were among the most likely in the country to move over the past several months as investors sought better returns on their cash in the wake of the Federal Reserve hiking interest rates. Also, stock analysts have remarked that SVB’s loan book was atypical and exposed the bank to excessive losses as rates rose and borrowers’ credit weakened. Bank management appears to have badly handled communication to investors and depositors about this process, so when it reported a recent loss from selling Treasury bonds to satisfy this deleveraging, it caused a loss of confidence in the close-knit VC community that couldn’t be stopped.

Although all banks, to one degree or another, are sitting on losses from their loan portfolios as a result of rate hikes, the banking sector is much more highly capitalized than during the Global Financial Crisis and the regulatory environment is much more strict. We do not expect significant contagion of SVB’s failure throughout the banking system, but we would not be surprised at incremental failures as the Fed continues to hike rates, probably peaking at some point mid-year. In fact, this incident with SVB will likely improve the already favorable lending environment for senior secured private lending, which is an asset class in many client portfolios. Also, SVB’s failure is an indicator for the Fed of possible casualties from its rate hiking campaign, which despite depressing asset prices, has gone forward with only modest financial failures thus far (e.g. crypto lending and British pension funding).

We’d be happy to chat with you more about this topic. In the meantime, we bid you a good weekend.