When Silicon Valley Bank (SVB) failed in March, it grabbed a lot of news headlines and social media attention. Now, as the crisis at that bank (and a few others) fades into the background, many people are understandably still left wondering: Is my money safe where it is?
Transparency and useful information are two things everyone wants from their financial relationships. This blog will explain a bit of what happened at SVB (as it relates to what caused the bank to fail) plus what Birchwood clients need to know regarding the insurance that applies to their investment accounts.
The short story of what got SVB in trouble is related to the capital markets. SVB had a large holding in US government bonds ($117 billion at the end of 2022). Historically, a 10-year US bond has been one of the safest investments in the world. However, some of SVB’s bonds were purchased when interest rates were low a few years ago. As the Federal Reserve raised interest rates to fight inflation, the bonds SVB was holding became less valuable. Unique to SVB was the fact that its clients had made deposits at the bank that were well in excess of the amount that would be insured against loss if the bank failed. When SVB’s clients were made aware of the risk that the paper loss in bonds posed to the bank, many tried to withdraw their money fearing a loss on their uninsured deposits. As with any classic bank run, SVB didn’t have the liquidity to meet the withdrawal demands of its clients so the bank failed and was seized by federal authorities.
The question immediately became: Will this happen to other banks?
Normally, bank deposits are guaranteed for up to $250,000 per depositor and per insured bank according to Federal Deposit Insurance Corporation (FDIC) guidelines. However, the US government stepped in and guaranteed the deposits of SVB in full. It did this to try to avoid other bank runs and to support the tech companies and their employees who kept cash on deposit at SVB. As of the writing of this blog, it appears that not many other banks are in a similar liquidity situation to SVB’s. However, following SVB’s collapse, many bank stocks sank—including Charles Schwab’s stock price.
Birchwood-managed investment accounts are held at Schwab, and all of them have insurance provided by either the FDIC or the Securities Investor Protection Corporation (SIPC). Even in the unlikely event that Schwab fails as a financial institution, the most likely scenario would be that all investment securities, such as mutual funds, exchange-traded funds, stocks, and bonds would transfer to a new custodian in their entirety. The cash in accounts would be insured up to the stated limits and restored. As such, our clients’ accounts aren’t susceptible to the same potential risk that an individual faces by having deposits in a bank account that exceed the stated insurance limits. Again, the limit is $250,000 for FDIC and $500,000 for SIPC protection, which includes a limit of $250,000 for cash. Of course, insurance doesn’t apply to potential losses in the value of an investment going down due to normal market activity.
In addition to the insurance from the FDIC and SIPC, Schwab also has an insurance policy through Lloyd’s of London and a credit line from the Federal Home Loan Bank System to act as another backup for our clients.
In general, Birchwood advisors do not recommend individual stocks for clients’ portfolios, so exposure to an individual bank’s failure is limited to a situation where stock in that bank is part of a mutual fund or an exchange-traded fund held for a client.
Trusting your money to a financial advisor is meant to give you peace of mind from having to think each day about whether or not your money is safe. However, that feeling of confidence can only exist within a trusting and transparent relationship. If you have questions about the insurance mechanisms that protect you when you work with an advisor from Birchwood, please reach out directly to them. They’ll be more than happy to explain things in greater detail and answer any questions you may have.