When the Banking System Fails
A lot of big things happened last week with the second largest collapse in the banking industry in US history.
Things are still unfolding.. but here’s what we know happened so far, what it could potentially mean for you and ways to mitigate future risks and keep your money safe.
Banks are a staple in our society and for good reason. They provide a sense of security within our systems that allows easy flow of the abstract thing we call money.
But what if that was not always the case?
I've said it once and I'll say it a million more times.. a system and process is only as good as the accountability and checks + balances placed within it.
What happened?
Last week, Silicon Valley Bank had the second largest banking collapse in US history.
This bank holds more than half of all startups in the valley and had about $170 Billion in deposits. So this is no small ordeal.
Like any bank, they leveraged the money you give them to hold, invested it and make money off your money (while charging you overdraft fees, which irks me endlessly but I digress.. )
They always keep a portion of it liquid and available for their customers but a good portion gets invested elsewhere.
Silicon Valley Bank had invested about 56% of its assets in treasuries and mortgaged backed securities. Usually that's a pretty safe bet, but only in times of low interest.
With interest rates going up these things aren't as valuable, so the investment went down.
Early last week, Silicone Valley Bank put out a press release that's pretty dramatic for a bank.
In a nutshell, the bank said in this release that they need to make up $1.8 Billion.
Mind you, they have $170 Billion in assets, so that is only ~1%!
It's not nothing but it's more about how it was presented → trying to take a weirdly conservative approach to try and shore up their balance sheet while on the same day their parent company announced they were going to "orderly wind down of Bank operations and a voluntary liquidation of the Bank is the best path forward."
Silicon Valley Bank had been a well established (about 40 years old), high reputation and been doing alright until this.
So why the collapse?
There is still a lot more to learn and so my opinion may change, but as it currently stands I believe it was two fold.
HORRIBLE messaging.
This screams rushed and sloppy.
This was rightfully, really scary messaging to the customers.
The parent company being shut down while investments are being lost, shares being liquidated, new investor out of nowhere and jeebus I also found out that the CEO sold a bunch of his stock at the same time.
That's way too much to pack into a three paragraph press release and expect it to be okay with people.There was not enough diversification of the banks assets.
Seriously, if there was ONE thing you take from me, it's always diversify.
Diversification is truly the key to life, yet it tends to only be appropriately celebrated and embodied when it comes to finances. But I digress..
Look, I want to honestly believe that Silicon Valley Bank was trying to signal stability with these actions. However, I don't know how SOMEONE didn't raise their hand and express the feelings/opinions of what it'd mean to investors and customers hearing these big moves all at once.
The toilet paper debacle of 2020 is a really great example of how people make rash decisions when fearful even when the fear isn't based on reality.
To the public, these big changes signaled danger, people got nervous and started to pull out even more.. so that 1% shortfall continued to grow until the federal government had to step in and seize everything an astonishing 48 hours later (guess tech world really does move faster than everyone else..)
Again, there's still a lot to learn. But in the meantime, big names like Roku and Etsy are scrambling because their money is tied up.
Etsy has sent out statements that deposits may be delayed.. that can be really scary and so the domino effect will be interesting as this unfolds.
What about insurance?
Luckily Silicon Valley Bank was FDIC insured but like any insurance that means there is a cap. That cap is $250,000 per account.
Which is great for the average personal checking/savings account but it is a pretty low benchmark for businesses, particularly in the tech industry.
What does that mean?
Well, we don't know yet. There are talks that the government should match dollar for dollar because this is due to no fault of the customers.
Very true.
However, others are saying no because then that gives banks unlimited risk capacity.
If a bank makes risky moves like Silicon Valley Bank did by being conservative with its asset diversification, than other banks can see this as a loophole to do as they please and the federal government will just come in if it doesn't work out and clean up their mess.
Also true.
Here's my take:
Look, I feel like it should be a mixture of both.
Yes, absolutely, give the account holders their money - crazy to me that's even a debate right now.
But here's the part we need to change → ACCOUNTABILITY
For once, can we start holding those who inflict a massive amount of damage because they felt they could profit more/better to not abide by basic principles of rules and regulations accountable for their actions?
By now, I'm sure you've heard me be very vocal about trying new things and break the mold. I do stand by this but I'm also a fierce advocate for doing so with intention, transparency and accountably. The actions this company chose to take, on many levels, did not feel like it was in the best interest of their consumer and especially when handling someone's money, you have a responsibility to them.
As you build your business, you inevitable build it on systems and processes. It's examples like this that highlight how vitally important it is to have checks and balances that lead to accountability within your essential systems and the importance of leading with integrity and intention.
Like - how on earth did that initial press release not get flagged?!
Also - how was it decided to be conservative with 56% of their assets by placing them in two places?!
Many business owners feel that checks and balances are irrelevant, bothersome and useless.. I say this because I've been told this while trying to implement them, haha! But again, it's examples like this that just bring it home how essential they are, along with the pitfalls of rushing your messaging.
What can I do?
That's the $170 Billion dollar question, right?!
First, make sure where you bank is FDIC insured. While it's not perfect coverage, you at least know there is federal oversight.
Second, I'd spread your funds across multiple banks. Bank failures is not an uncommon occurrence, unfortunately. If you keep all accounts below the FDIC threshold than you will always be covered.
Third is invest in low-risk options. If you're concerned about your money being safe in a bank, invest it in things like government bonds or treasury bills.
Every business is different so the options of what you can do to keep your money safe can be different but if you stick with diversification, you'll always be hedging your bets.