Silicon Valley Bank's Liquidity Crisis and How Businesses Can Avoid Losing Their Money
Silicon Valley Bank’s recent liquidity crisis has been a cause of concern for many business owners, particularly those with investments or accounts held there. This has highlighted the importance of understanding how to protect your money and assets in case of similar financial events occurring in the future. Here, we look at what happened at Silicon Valley Bank and discuss key strategies businesses can implement to avoid losing their money due to liquidity issues.
SVB had announced that it had sold off treasury bond securities at a loss. These realized losses were due to the Federal Reserve interest rate hikes over the past year created in order to fight off inflation — and as interest rates go up, bond prices went down. This announcement had triggered a panic among VC and PE firms who began advising their clients to withdraw their money from the bank — causing a run on the banks.
What is the FDIC?
The FDIC is an agency of the US federal government that provides insurance for bank failures. The FDIC insures deposits up to $250,000 per depositor, per insured bank, for each account ownership category at an FDIC-insured bank. This means that if a depositor has accounts in different ownership categories, such as individual accounts, joint accounts, and retirement accounts, the FDIC insures each account up to $250,000. The FDIC does not insure investments such as stocks, bonds, mutual funds, or other financial products that banks may offer.
How to Mitigate Risk?
This incident highlights the importance for business depositors to be aware of the potential risks associated with depositing funds in a bank, and to take steps to protect their money in case of a liquidity crisis. Here are some strategies that business depositors can use to avoid risks:
Diversify deposits: One of the most effective ways to mitigate the risk of a liquidity crisis is to spread deposits across multiple banks. By keeping funds in multiple banks, businesses can reduce their exposure to any one bank and the potential for loss due to a bank run. Additionally, deposit insurance is typically available up to a certain limit per depositor per bank, so spreading deposits across multiple banks can increase the amount of protection available.
Choose stable banks: Businesses should carefully research and choose banks that have a strong financial position, solid reputation, and sound risk management practices. Banks with a long track record of stability and profitability may be less likely to experience a bank run.
Monitor bank news and ratings: Business depositors should regularly review news and ratings about their banks, such as credit ratings from reputable agencies like Moody's or Standard & Poor's. If a bank's ratings deteriorate significantly or there are reports of financial troubles, depositors may want to consider moving their funds to a more stable institution.
Use alternative investments: Business depositors can consider investing in alternative assets that are not subject to the same risks as bank deposits, such as government bonds or highly rated corporate bonds. These investments may offer higher yields than bank deposits, but they also come with their own risks.
Maintain ample liquidity: Businesses should maintain sufficient cash reserves or lines of credit to cover their short-term cash needs, even in the event of a bank run. This can help them avoid having to withdraw all their funds from a bank during a crisis, which could exacerbate the situation.
What Happened to the Depositors of SVB?
Over the weekend, the Treasury, Federal Reserve, FDIC, and Joe Biden has commented that all depositors will have access to all of their money starting March 13 and that the losses will not burden the taxpayers.
In conclusion, while the Silicon Valley Bank liquidity crisis highlights the potential risks associated with bank deposits, there are strategies that business depositors can use to mitigate those risks. By diversifying deposits, choosing stable banks, monitoring bank news and ratings, using alternative investments, and maintaining ample liquidity, business depositors can help protect their funds and avoid potential losses in case of a bank run.