Understanding the Recent Silicon Valley Bank and Signature Bank Collapses: What You Need to Know
By: Katelyn Murray, CFP®, ChFEBC®, FBS®, CFT-1™, ECA -
The recent collapse of Silicon Valley Bank and Signature Bank has sent shockwaves through the financial industry and caused many investors to worry about what the future may hold. Here are five key things to know about the collapse and its impact on investors:
Poor Management Decision-making Led to the Collapse
Both banks collapsed as a result of poor management decision-making that prioritized short-term returns over long-term fidelity. Silicon Valley Bank chose to invest its deposits in government bonds and securities with long-term maturities. These types of long-term securities happen to be among those that are most impacted by interest rate hikes. The stage was set for disaster, then, when the Federal Reserve raised interest rates, thus shattering the value of the government bonds underpinning SVB’s deposits. Given this and the fact that start-ups and tech companies who form the basis of SVB’s clientele have been struggling since February 2022, the run on the bank that occurred last week seems almost inevitable in retrospect.
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The case of Signature Bank is a bit different, but similar. Signature carried a pretty high degree of cryptocurrency exposure, which is a risk in itself. When the cryptocurrency market crashed, they suffered significant losses. Unfortunately, both banks' decisions to prioritize short-term gains over long-term stability ultimately led to their downfall.
FDIC Insurance is Crucial
The collapse of these banks highlights the importance of FDIC insurance. The limit for FDIC insurance is $250,000 per depositor per insured bank, but popular account types like money market savings accounts are often not covered by FDIC. Smart investors should ensure their bank deposits are fully covered by FDIC. If you have more than $250,000 to protect, consider reaching out to a Serving Those Who Serve advisor today to learn about our enhanced savings programs that offer coverage up to $50 million.
Know Your Bank's Risk Profile
The collapse of Signature Bank is a reminder that investors should be aware of their bank's risk profile. While cryptocurrencies have the potential for high returns, they are also highly volatile and risky. Investors should be aware of the risks involved in any investments their bank is making on their behalf.
Diversify Your Investments
Diversification is key to managing risk in any investment portfolio. Investors who had all their money in either Silicon Valley Bank or Signature Bank would have lost everything in the collapse. By diversifying their investments across different banks, asset classes, and geographies, investors can reduce their overall risk.
Stay Informed and Be Proactive
The collapse of Silicon Valley Bank and Signature Bank serves as a reminder that investors need to stay informed and be proactive in managing their finances. Regularly reviewing your bank statements, keeping up with industry news, and seeking advice from trusted financial advisors can help you make informed decisions and avoid financial pitfalls. If you don’t yet have a trusted financial advisor, consider reaching out to the team at Serving Those Who Serve—we’d love to talk with you about your needs.
**Written by Katelyn Murray, Financial Advisor. The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Jennifer Meyer and not necessarily those of RJFS or Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy suggested. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment or financial decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
About the Author:
Katelyn Murray is a CERTIFIED FINANCIAL PLANNER™ (CFP®) professional, a Certified Financial Behavior Specialist® (FBS®), a Certified Financial Therapist™ (CFT-1™), and an Equity Compensation Associate (ECA). A lifelong student, she also holds a Masters Degree in Business Administration as well as a graduate certificate in financial psychology and behavioral finance.
Katelyn has been helping Feds and contractors build the retirement of their dreams for almost a decade. Her unique approach merges financial psychology with traditional wealth management expertise to create an integrated financial planning approach that helps clients make the most of the one resource they can’t get more of: time.
Katelyn has appeared as a speaker on The W Pulse podcast, The Liquidity Event podcast, and has led multiple break-out sessions at national industry conferences. Here at STWS, she writes on financial planning and behavioral finance topics. When she’s not writing for our blog, you can find her serving as a financial advisor and Relationship Team Lead for our STWS clients.