March 14, 2023

On March 10, news broke that Silicon Valley Bank became the largest bank to fail since the 2008 financial crisis. Following the rapid collapse of the tech-sector giant, California state regulators seized control and put the Federal Deposit Insurance Corporation in charge of roughly $210 billion in assets and $175 billion in deposits. It’s now the second-biggest shutdown on record in U.S history.¹

The events that unfolded sent shockwaves across banking and investor communities. As part of the fallout, Signature Bank out of New York City closed its doors March 12, becoming the third-largest bank failure our country has seen.

While bank deposits are typically only FDIC insured up to $250,000, the FDIC, Federal Reserve and National Treasury have announced that deposits to both banks will be fully funded using the government’s bank deposit insurance fund. Additionally, the Wall Street Journal reports that the Fed and Treasury are prepared to use emergency lending authorities to fund additional bank withdrawals, a move intended to prevent further bank runs.

On the heels of both closures, President Biden announced no losses by SVB and Signature Bank will be borne by taxpayers, and customers will be protected and paid back in full.²

“The banking system is safe,” he said.

For people who may or may not be directly impacted by the events, it’s an unsettling time in the markets, and many Americans are left wondering.

Interested in how this may impact your investment portfolio? Get the take from Craig Birk, Empower Personal Wealth's Chief Investment Officer.

What does it mean when a bank fails?

If you’re not sure, you’re not alone.

According to the FDIC, “A bank can be closed when it is unable to meet its obligations to depositors and others.” Essentially, as in Silicon Valley Bank’s case, a bank can go belly up when the value of its assets falls below the value of its current liabilities.³

So, what happened with Silicon Valley Bank?

Silicon Valley Bank, a regional institution in Santa Clara that focuses on high-growth businesses in areas such as technology, was taken over by regulators and placed in receivership for inadequate liquidity and insolvency.⁴

The bank, once flooded with cash, invested the money in Treasury bonds and mortgage-backed bonds. But with rising inflation and historic rate increases, those securities declined in value, and Silicon Valley Bank had less money available than the volume of depositors looking to access their funds.^5,6

“This was another stark reminder to markets that banking can be a difficult business to be in when interest rates rise suddenly and when economic storm clouds start building,” says Tom Nun, a portfolio strategist at Empower.

Previously, the biggest bank failure in the U.S. was Washington Mutual in 2008. There were several reasons for its demise with the housing market crash serving as one of the main culprits. In 2007, Washington Mutual suffered a net loss of over $65 million because of defaulted mortgages.^7,8

How does a bank work?

You probably know most banks don’t actually have every penny of everyone’s money stored away in burlap bags.

For example, when you open a savings or checking account, the money you deposit is used by the bank to provide loans to other individuals, businesses and organizations. In turn, the bank charges interest and potentially earns a profit based on its investments. The cycle continues so the bank has the necessary funds available and accessible when you head to your local branch to make a cash withdrawal.⁹

Prior to going under, Silicon Valley Bank was the 16th-largest bank in the U.S. JPMorgan Chase is currently No. 1 with more than $3 trillion in total assets, followed by Bank of America, Citibank and Wells Fargo.

Is my money safe?

Typically, yes.

For FDIC bank members, which most major banking institutions in the U.S. are, the FDIC insures up to $250,000 per customer. That includes savings, checking and money market deposits accounts. Joint accounts, if you share an account with your spouse let’s say, are protected up to $500,000. The FDIC also insures up to $250,000 per ownership category, including funds in some retirement accounts like an IRA.¹⁰

Things get a little trickier for accounts over the $250,000 limit.

If your bank fails and you have over $250,000 in deposits, you may get your money back from the sale of the bank’s assets, although that process could take several years to complete.

The government’s announcement on Sunday that it will fully back all of SVB’s depositors means that even those with balances higher than $250,000 will have immediate access to their funds. (This is a rare, but likely necessary move).

Biden stated depositors would have immediate access to all of their money as of March 13 and that their “deposits will be there when you need them.”^11,12

“The FDIC, Federal Reserve and U.S. Treasury Secretary jointly announced that all depositors — both insured and uninsured — will be made whole by the FDIC, a somewhat unusual step that served to stabilize market sentiment,” Nun says.

Do I need to worry about the banking system?

The decision by the Fed and Treasury to stand behind depositors should help restore financial stability, trust, and confidence in the system.

While Silicon Valley Bank is making national headlines right now for its demise, bank failures are rare. “Markets and the U.S. economy itself are extremely durable institutions in the long-run and the banking sector more broadly is in good health,” Nun says.

If you have any questions or concerns about your money, you can always talk to your financial advisor for guidance.