How did this happen? As I’m writing this, banks are failing (SVB, Signature Bank and Silvergate) were significantly overexposed. They grew very aggressively with too little risk management. SVB was highly concentrated in the tech world and venture capital (venture capital = investing in start ups. According to a study by Harvard Business School 75% of venture capital startups fail to return investors capital). Signature Bank and Silvergate were in the crypto space - very volatile and risky as well. Credit Suisse is now in the news - they have had issues for a few years now with scandals, a criminal conviction etc. so this isn't surprising and now the Swiss Central Bank is bailing them out.
Banks invest your money and try to make more money. SVB tried to do the smart thing by investing a big chunk in Treasuries but they did this when interest rates were at record lows! If you have to sell a treasury before it matures and interest rates have gone up there will be a loss (which they had to because they needed the money). Bonds lose value when interest rates go up. Clearly rates were going to go up when they were at record lows….This was poor risk management on SVB's part.
Now What? Luckily there is FDIC insurance which means money in your bank is insured up to $250,000. Anything over that is at risk. Currently the FDIC is making a “systemic risk exemption” and making everyone whole i.e. anything over the FDIC limit will be returned to SBV customers. What this tells me is the government is willing to step in to do whatever it needs to do to instill faith back into the financial system.
My Point of View: I feel awful for the businesses that trusted SVB with their funds and I'm glad they will be made whole. Small businesses are crucial to our economic growth. I do think executives at SVB that were in charge of the risk management at these banks need to have some repercussions as they failed and perhaps the risk management requirements for banks needs to be reevaluated. The typical person doesn't have the knowledge on how to access the health and risk management of a bank. Many bigger businesses need to keep more than $250k in a bank account to just cover payroll….
The Lesson to Be Learned - Risk Assessment & Diversification are key!
WHAT ABOUT CHARLES SCHWAB? & MY INVESTMENTS?
For those that aren't aware, Charles Schwab got mentioned in this mess on the *bank side*. Where your investments are held is through the brokerage company not the bank. Your investments at any brokerage (Vanguard, Schwab, Fidelity) have multiple protections.
The SEC's Customer Protection Rule - Your investments are segregated assets and not available to general creditors as YOU own them (not Schwab). You own the investment in Apple for example. Schwab has to segregate these assets by law from their business activities and deliver them to you upon your request.
SIPC insurance - Brokerages have their own insurance called SIPC Insurance - up to $500k per type of account (joint account, individual account, IRA). If you had two joint accounts only $500k would apply. SIPC insurance is different than FDIC insurance because again YOU OWN the underlying assets not the brokerage. So if a brokerage fails, you owns whatever stocks, bonds, etc. in your account and eventually get it back regardless of whether the brokerage continues to exist. SIPC insurance is largely for the cause of fraud which is so so rare (think Bernie Madoff situation here) .
Additional Protection - Schwab has additional protection with Lloyd's of London.
That's a lot of protection! Recovery rate on brokerage firms has been 98.7% with the SIPC historically. I'm not concerned here.
Now Charles Schwab ALSO has a bank and in that case FDIC would apply. Go back to #1 above.
It's been a crazy few days but the news capitalizes on fear! I have money at Schwab and no I'm not moving it. I'm not running to the bank to get cash. I'm focusing on what I can control (see 1 & 2 above), understanding the facts, the protections that are in place to protect us and going on with my day! Look there is risk in almost anything we do - when we drive a car, get on a plane, invest and where we keep our money but we take calculated risks. You can't live in fear and unfortunately that's what the news wants you to do. Again, focus on what you can control and go on and LIVE this wonderful life!
Going Forward: I do think there could be more bad news coming. We came out of the longest bull market (up stock market) in history, the Fed gave away SO much free money (hello stimulus checks) and now it's time the economy corrects itself. I know it's not fun but this is part of the cycle of how it works. But from what history shows - it will start recovering when we think it's at the worst. The stock market always knows before we do. :) Oh how I love the stock market….
TOWNSEND TIPS - JUST FOCUS ON THIS
First, take a deep breath…..
Do not have more than $250,000 in a bank. Anything over that is not FDIC insured. If you have more than this there are ways to get more than $250,000 FDIC insured, but you need a specific product/service. Reach out to your banker or financial advisor.
Diversification is the Key to good Risk Protection- This is why we invest in thousands of companies, in multiple industries and on different continents - never one industry, or one company. That is a big no no. My rule of thumb is no more than 5% (10% is my absolute max) of your net worth in one company, in crypto, or in venture capital.
If you would love to have a partner in all this on your financial team to walk you through topics like these and how they impact your unique situation, schedule a free intro call here.
