You may have heard that Silicon Valley Bank collapsed on Friday, March 10th, 2023. This is the second largest bank collapse in the history of the United States and caused several people to (understandably) feel a healthy dose of anxiety about how this impacts them personally – and what it means for the future.

The best antidote for anxiety or worry is facts and historical data, so that’s what we’re going to focus on today. Let’s dive in.

What Happened?

The news has been running wild this weekend with news about the SVB collapse, and (as is always the case when something hits the 24 hour news cycle) there’s been a lot of conjecture about what this could mean for the future of tech and the financial sector.

Here’s what actually happened –

On Wednesday, March 8th, the federal government took over SVB. This happened as a result of an unforeseen filing by SVB stating that they needed to raise close to $2.25 billion from venture capitalists to backfill the mass sell-off of assets that were negatively impacted by high interest rates. In their mid-quarter report, they stated:

“We have sold substantially all of our Available for Sale (AFS) securities portfolio with the intention of reinvesting the proceeds, and commenced an underwritten public offering, seeking to raise approximately $2.25 billion between common equity and mandatory convertible preferred shares. As a part of this capital raise, General Atlantic, a leading global growth equity fund and longstanding client of SVB, has committed to invest $500 million on the same economic terms as our common offering.”

Customers withdrew a whopping $42 billion of deposits within 48 hours and, by EOB on Thursday, March 9th, SVB had a negative cash balance of -$958 million.

Regulators stepped in, and the federal government took control of SVB by Friday. SVB was a cornerstone of the tech community, and several large companies (Roku, Circle, Roblox, and Etsy – to name a few) relied on SVB to fund business ventures, including critical infrastructure expenses like payroll.

What Happens Now?

The FDIC has released a statement Monday, March 13th, about the actions they’re taking. As of now, they’ve transferred all assets (insured and uninsured) to a FDIC-operated bridge bank. However, “Shareholders and unsecured debt holders will not be protected.”

The SEC also released a statement:

"In times of increased volatility and uncertainty, we at the SEC are particularly focused on monitoring for market stability and identifying and prosecuting any form of misconduct that might threaten investors, capital formation, or the markets more broadly,” said SEC Chair Gary Gensler.

Was SVB FDIC Insured?

Most people have heard of FDIC insurance – it’s something you look for before signing up for a checking or savings account at a bank or credit union to ensure your deposits will be insured in the event of the bank’s collapse.

While SVB was FDIC insured, there are important caps to keep in mind. For example, FDIC insurance only covers up to $250,000 in deposits. The vast majority of SVB’s customers were venture capitalists or tech startups who had deposited well above that cap. However, in an unprecedented move to protect the U.S. economy, the FDIC is waiving these limits in light of the SVB collapse and using insurance funds to protect depositors beyond the traditional limit.

Why Does It Feel Scary?

So, why does the collapse of a bank that largely served tech startups and venture capitalists feel nerve wracking? For many, it feels like an echo of a 2008 financial crash – and the fear of this collapse being indicative of future banking turbulence is very real.

As tech CEOs said in their petition to federal employees: "We are not asking for a bailout for the bank equity holders or its management; we are asking you to save innovation in the American economy. Silicon Valley Bank's failure has a real risk of systemic contagion."

What You Need To Know

While the collapse of SVB may feel jarring, and large companies or venture capitalists may be impacted, most individuals will not feel the shock waves of this event. First and foremost, the vast majority of individuals and families have less than the $250,000 FDIC insurance cap deposited in traditional checking and savings accounts. To review, FDIC insurance covers:

• Checking accounts
• Savings accounts
• NOW accounts
• MMDAs
• CDs
• Money orders, cashier’s checks, etc.

The traditional investor is also covered by Securities Investor Protection Corporation or SIPC. SIPC covers up to $500,000 in investments, with a $250,000 cash coverage limit, should anything happen to an investor’s broker.

Note: FDIC will cover an individual for any losses up to $250,000 dollar-for-dollar, plus any interest earned since the time of the bank’s collapse or default. SIPC will not cover protection if your securities’ value decreases.

In Summary

Unlike the financial turbulence of 2008, this incident was isolated. As investors, we have no reason to believe that this is a harbinger of more banking collapses to come. Additionally, because FDIC and SIPC insurance protects most families, the problems large tech companies are facing in light of SVB’s collapse isn’t a situation families will likely find themselves in.

However, it’s also understandable that an event like this can cause financial anxiety. If you have concerns, we encourage you to reach out. We’re here to help and clarify any information you may have questions about!

Disclaimer:

First Dakota Wealth & Trust is the fiduciary investment department of First Dakota National Bank with trustee powers to serve clients during their lifetime, during incapacity, and after death. We help clients develop a financial roadmap to help simplify their financial future.

Please note that neither First Dakota National Bank nor First Dakota Wealth & Trust Department, nor its employees provide tax or legal advice. This is intended for informational purposes and is not intended to constitute legal or tax advice. Please consult your attorney and/or tax professional for advice related to your specific situation.