Silicon Valley Bank – What Happened?
You may have seen recent news regarding the collapse of Silicon Valley Bank (SVB). In light of this event, we wanted to provide you with some information regarding the event itself and provide some information regarding the protection you have embedded within the accounts you hold at Fidelity.
Silicon Valley Bank (SVB) – What Happened:
SVB was the 16th largest bank in the United States before it was closed by regulators on Friday, March 10th, in essence going under in a matter of 24-48 hours from the time news broke that the bank was in trouble. SVB’s primary clients were tech and venture capital companies and their executives. The bank was known for offering higher interest rates on deposits than its competitors. To fund those higher rates, SVB used “excess” cash and invested it by buying longer-term, higher-yielding government bonds. The problem was, however, that as liquidity was needed (i.e., customers asked for their deposits back to get higher rates elsewhere), SVB was forced to liquidate the bonds they had purchased at a loss. To review some bond basics, if a bondholder holds a bond to its maturity (i.e., the date it is due) and there is no default, the holder will receive both the interest earned on the bond plus the face value of the bond. If, however, a bondholder sells a bond before its maturity, the bondholder may receive more or less than the bond’s face value, because the bond’s fair market value will change as interest rates increase or decrease. In SVB’s case, as interest rates rose, bonds held by SVB dropped in value. As SVB started to sell those bonds prior to maturity to meet liquidity needs, those losses were realized and panic ensued. In a domino effect, customers began to rapidly withdraw their deposits, only making the situation worse and crippling the bank.
At the end of last week, there was fear that SVB’s depositors would lose more than what the Federal Deposit Insurance Corporation (FDIC) standard insurance would cover, which is $250,000 per depositor, per bank, per account. Thankfully, the Department of the Treasury, Federal Reserve, and FDIC issued a joint statement on Sunday informing depositors that they would have access to all of their money on Monday, March 13th, meaning no losses would be borne by the depositors for cash they had on hand at SVB. The FDIC does not, however, insure money invested in stocks, so shareholders of SVB have suffered, as the bank’s stock price went from a high of over $700 per share in October 2021 to having essentially no value whatsoever at the end of last week.
Although concerning, we believe this story does not represent a systemic issue within the banking industry, but rather one caused by SVB’s lack of risk management.
If you would like to learn more about the SVB collapse, here is the link to an article put out by Fidelity.
What Does This Mean for You:
There are various safeguards in place at Fidelity Investments, which can help to ensure your assets are protected.
First, all accounts at Fidelity are automatically protected by the Securities Investor Protection Corporation (SIPC). SIPC is there to protect investors when a brokerage firm becomes financially troubled, providing protection against the loss of cash and securities (stock and bonds, including money market funds) held in one’s brokerage account(s). This protection covers up to $500,000 in securities with a maximum of $250,000 on claims for cash awaiting investment. It is important to note that SIPC does not protect against the decline in value of one’s securities, and certain investments are not covered by SIPC. Please visit sipc.org to learn more about this coverage.
In addition to SIPC coverage, Fidelity also provides additional coverage from Lloyd’s of London together with other insurers. This coverage only comes into play when SIPC coverage is exhausted and, like with SIPC, it will not cover investment losses in one’s account. The total amount available through this coverage is $1 billion; there is no per-customer limit on the amount of securities that are covered, but there is a $1.9 million limit on cash awaiting investment.
To learn more about the safeguards in place at Fidelity, please visit here.
What Other Options Are There for Cash:
The joint statement issued by the Department of the Treasury, Federal Reserve, and FDIC over the weekend is encouraging, and could mean higher FDIC limits going forward. That said, in general, banks still are not paying favorable interest rates on cash held at the bank. If you are holding cash in excess of FDIC limits and/or are looking for investment options that have reasonable yields with limited risk, we do have some alternatives for you to consider:
- Treasury Bonds – Treasury bonds are issued by the federal government, are guaranteed, and have varied rates of interest depending upon the maturity. We can purchase US Treasury bonds that mature in 6-7 months and are currently yielding around 4.7% annually. These bonds do “mark-to-market,” which means that you may see fluctuations in the value of your holdings during their holding period. However, as long as you hold these bonds to maturity, you will always receive the par value of the bond plus any accrued interest, if applicable.
- Brokered CDs – unlike local banks, which generally have limited options, we have access to nationally brokered CDs from banks across the country. Most often, we can find significantly better rates than are offered locally. As it stands right now, we can find 6-month CDs paying interest around 5% annually. Interest paid on CDs is fully taxable.
- Any brokered CDs held in a Fidelity brokerage account are also eligible for FDIC insurance.
As always, thank you for reading and please do not hesitate to reach out to us if you have any questions concerning your accounts held at Means.