Zenith Wealth Partners

Protecting Your Assets: Banking Insurance, What it is and Why You Should Care

SVB and its Importance, Specifically for Startups

You might remember this past spring as a tumultuous time for the banking industry, reminiscent of the 2008 financial crisis. At the center of this turmoil was the 40-year-old financial institution known as Silicon Valley Bank (SVB). SVB uniquely tailored its products to be a major partner for startups and venture capital, positioning itself as a leader in the startup banking landscape. The bank’s March 2023 failure was a result of a combination of factors, including mismanagement, bad loans, unprecedented withdrawals (as a result of SVB’s unique clientele), and a lack of sufficient capital. This failure is significant because Silicon Valley Bank was known for its expertise in providing funding to tech startups that appeared too risky in the eyes of more well-known, traditional banks, and its collapse has had a ripple effect throughout the entire industry.

SVB historically benefited from an investment approach that allocated customer deposits into Treasury and mortgage bonds. However, this strategy fell short in the new inflationary and high-interest rate economic environment, as the Federal Reserve was in the midst of rapid interest rate hikes, which eroded the value of these bonds. This issue was compounded by historically high withdrawals, forcing the bank to liquidate investments to meet customer demands. At the moment of its collapse, SVB ranked as the 16th largest bank in the U.S. by total assets. Its failure represents the second-largest in U.S. history and the most significant since the 2008 financial crisis.

When the collapse occurred, depositors rushed to withdraw their funds, reigniting a question that many startups hadn’t had to think about in over a decade: What becomes of depositor funds if the bank fails to fulfill its obligations?

History of The FDIC

Established in 1933 as a reaction to the bank runs and failures during the Great Depression, the Federal Deposit Insurance Corporation (FDIC) serves to safeguard depositors in situations like the SVB collapse. However, coverage is capped at $250,000 per account type per institution. While this federal insurance provides assurance for deposits up to that limit, any amount exceeding it faces an uncertain future in the event of a bank’s failure. Although this limit is usually sufficient for the average person, the collapse of SVB posed a unique challenge for high-growth startups and small businesses that had significant funds in their accounts.

What to do if you have more than 250k

So what should you do if you’re a business holding over $250,000 and want to make sure that cash is adequately protected? When a bank collapses, depositors holding large account balances face the risk of not recovering their entire funds. Such customers are typically issued certificates for their uninsured deposits, placing them among the first to be repaid from any recovered assets. To mitigate this risk, diversifying your funds across multiple banking institutions is key to ensuring full insurance coverage for your deposits. Various strategies for diversification include opening accounts with different banks, opting for accounts in distinct ownership categories, adding a joint owner to an existing account, utilizing IntraFi network deposits, selecting a MaxSafe account, choosing an account with additional Deposit Insurance Fund (DIF) coverage, or opening a brokerage deposit account.

The Results of Silicon Valley Bank

In the end, the FDIC had to intervene and rescue SVB by taking over the bank. As a result, nearly $175 billion in customer deposits were placed under the regulator’s control. Fortunately, depositors were made whole beyond the original $250,000 guarantee by utilizing The Deposit Insurance Fund (DIF). Additionally, the Federal Reserve facility came to the rescue by offering loans of up to one year to banks, saving associations, credit unions, and other institutions through the new Bank Term Funding Program (BTFP). Thanks to these actions, the industry was able to avoid a catastrophic collapse and recover from the fallout of SVB’s failure.

All written content is for information purposes only. Opinions expressed herein are solely those of Zenith, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

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