In just the last few weeks, consumers watched helplessly as Silicon Valley Bank and Signature Bank fell, and Credit Suisse came tumbling after. Such bank failures can feel terrifying because they remind us of the fragility of a system we like to assume is robust.
But the lesson from SVB’s failure is not that such downfalls are impossible to predict. Not only can we learn the warning signs of unsustainability before they make the front page, but also we can figure out the best ways to protect ourselves.
Here’s what SVB’s failure can teach us.
The Bank Run
The Silicon Valley Bank collapse occurred because of a classic bank run. Banks don’t keep depositors’ money in a vault under the building. They lend it out to borrowers (both individuals and businesses) in order to earn interest. However, they are required to give depositors their money back on demand. A bank run occurs when too many depositors ask for their money at once and the bank cannot keep up.
Theoretically, a bank run could happen at any time. (You probably remember the bank run scenes in It’s a Wonderful Life or Mary Poppins, when customers react to little Michael Banks demanding his tuppence back.) The banking system works in general because depositors don’t get easily spooked and demand their money—unless someone starts panic-tweeting about their bank.
Avoiding a Bank Run
According to Kevin L. Matthews II, founder of the financial education firm BuildingBread, SVB’s customers reacted in a very predictable and human way once the bank run began, which made the situation worse. “By rushing to the bank, you’re inadvertently causing the bank to crash,” Matthews explains.
As scary as it may sound to hear that your financial institution can’t afford to provide depositors with their money, Matthews wants us to remember that we have government protection programs for a reason. Thanks to the Federal Deposit Insurance Corporation (FDIC), SVB’s depositors will keep all their money. That’s true of any bank depositor who keeps no more than $250,000 in the bank.
“FDIC insurance kicks in within a matter of hours,” Matthews says. “It’s very unlikely to be a situation where you’ll lose access to your money for an extended period of time.”
Because of the FDIC, your money will be safe no matter what—and avoiding a panicked withdrawal of your funds can help ensure that the bank doesn’t have to rely on the FDIC.
So what spurred the run on SVB? As with many collapses, it started because of abundance.
“We’re seeing the ramifications of the unsustainable gains from 2020 and 2021,” Matthews says. “With low interest rates, both tech stocks and hiring in the tech sector exploded.”
Silicon Valley Bank enjoyed billions of dollars in deposits during that time and invested some of its deposits in U.S. Treasury debt. Unfortunately, “as the Fed raised interest rates, the value of those bonds fell sharply,” Matthews says.
When the tech sector contracted post-pandemic, more and more of SVB’s clients withdrew funds, which meant the bank had to liquidate some of its investments at a loss. When depositors learned that, they panicked and withdrew all their money en masse—and that was the death knell for Silicon Valley Bank.
Protecting Yourself From a Bank Collapse
Post-collapse, it’s very easy to find information about SVB’s investments in U.S. Treasury debt, even though the average bank customer was not aware of this beforehand. But this information is available if the bank is publicly traded.
“You can take a look at its financial statements under its investor relations page,” Matthews explains. “The balance sheet will show the bank’s assets and liabilities, and the income statement will show whether or not the bank is profitable.”
Unfortunately, interpreting a bank’s profitability is both more than the average consumer has time for and very subjective. (There’s a reason for the old joke about two economists, three opinions.)
That’s why Matthews recommends that the average consumer stay within the FDIC-insurance limits rather than obsessively monitoring the investment decisions of their bank. The FDIC guarantees deposits of up to $250,000 per depositor per bank, and it’s possible to increase that protection amount.
“You can spread the money out [among] banks, add beneficiaries, or consider joint accounts,” Matthews says. “Every beneficiary or joint owner gets an added $250,000 of FDIC insurance.” This means a single account holder who lists four beneficiaries would enjoy up to $1.25 million in FDIC insurance at every bank where they have an account.
With the benefit of hindsight, it’s very easy to point fingers at SVB for these mistakes. But the collapse of this bank follows many of the same patterns of other major bank failures. While the specific details of each failure may vary slightly, each one is plagued by the same problem: overconfidence.
SVB felt overconfident about the tech sector boom. The bank assumed it could always cover withdrawals with the continued influx of big deposits and tied up its money in illiquid and low-paying investments. But any company that makes assurances of huge future results is writing checks that its assumptions can’t cash.
Overconfidence also spurs under-diversification. SVB didn’t feel the need to cultivate clients outside of tech or invest in more liquid investments. When a company doesn’t diversify, it increases the likelihood that something will topple and take the whole thing down.
Consumer Confidence versus Corporate Overconfidence
After a bank fails, there’s plenty of blame to go around—but none of that blame should be assigned to the average account holder. It is not the consumer’s job to be a bank watchdog nor should anyone feel the need to understand corporate investments just to feel confident that their checking account is safe.
Since we do have government protections, Americans can continue to bank with confidence as long as they understand the limits of FDIC insurance. The necessary changes to prevent the next collapse must come from the financial institutions themselves—or, more accurately, from regulation that requires banks to put the brakes on their overconfidence.
Until that happens, understanding the FDIC and keeping a cool head when panic strikes are all you need to do to protect yourself and your money.
Emily Guy Birken is a Milwaukee-based personal finance writer. Her books include The 5 Years Before You Retire, Choose Your Retirement, Making Social Security Work for You, and End Financial Stress Now.