What's happening with Silicon Valley Bank?

Silicon Valley Bank (SVB) is a commercial bank that provides services to startups and entrepreneurs. Over the last several years, startups deposited an unprecedented amount of money into the bank ($189b) and SVB purchased a large amount of long-term bonds with those deposits. As interest rates have gone up, the market value of these long-term investments fell. Meanwhile, venture capital funding has tightened so startups have been withdrawing more and more money held by SVB.

The result is that SVB was sitting on a very large unrealized loss right when the pace of their customer withdrawals increased. To address this, SVB announced a fire sale (i.e., selling long-term bonds at a loss) to raise cash, protect their long term assets, and improve their financial health metrics. Investors and venture capitalists were concerned about these actions and that concern very quickly turned into a "bank run" as companies overwhelmed the bank with withdrawals and the FDIC had to step in.

On Sunday March 12th, a joint statement by the Department of the Treasury, Federal Reserve, and FDIC confirmed that the FDIC will complete its resolution of Silicon Valley Bank failure in a manner that fully protects all depositors. Depositors will have access to all of their money starting Monday, March 13.

As news of the SVB failure came out, people raised concerns about some other banks being exposed to similar risks, which is likely why the joint statement specifically details a similar resolution for Signature Bank, New York, New York. Signature Bank was closed March 12th by its state chartering authority. All depositors of Signature Bank will similarly be made whole.

FDIC and NCUA insurance

The Federal Deposit Insurance Corporation (FDIC) and National Credit Union Administration (NCUA) are responsible for insuring deposited funds in the event that a financial institution fails. The FDIC provides federal insurance for bank accounts and the NCUA insures credit union accounts.

When the FDIC or NCUA steps in due to a bank run, they typically take control of the affected financial institution. The FDIC or NCUA may attempt to sell the bank or credit union to another institution or liquidate it, depending on the situation.

Regardless of the resolution, depositors are protected up to certain limits. For example, the FDIC insures deposits up to $250,000 per depositor, per insured bank, for each account ownership category. The NCUA has similar protection limits.

NPR's All Things Considered did great story, Anatomy Of A Bank Takeover, describing how quickly the FDIC acts in these situations.

How does this affect me?

If your company uses Silicon Valley Bank or Signature Bank, your company may have short-term issues with payroll and other short-term cash needs, but these payments should be able to resume processing as soon as tomorrow.

If you were a retail customer of SVB or Signature Bank, it's time to find a new bank or credit union. The bank website will have more information on how to access your deposits so you can move your money to another financial institution.

For everyone else:

• If you're well under the FDIC or NCUA coverage limits or are otherwise protected, you don't need to do anything, but it can be helpful to keep some cash in a second financial institution. Even absent a bank failure, it's possible to be temporarily locked out of an account for various reasons, banks sometimes experience technical issues, etc.

• If you have more than $250,000 cash, even if it is only a short-term thing (e.g., after selling a home and before buying a new home), then read the below section on how to insure more than $250,000 in cash.

What about my brokerage?

First of all, brokerage accounts are not suitable for your cash savings (although investing cash into some types of low-risk securities is relatively safe, see below for more information). Use an FDIC-insured or NCUA-insured account (anyone remember this megathread?).

Brokerage firm failures are rare, but when they happen, SIPC protects the securities and cash in your brokerage account up to $500,000. The $500,000 protection includes up to $250,000 protection for cash in your account to buy securities (source). Note that SIPC insurance does not cover losses due to any decline in the value of securities in your brokerage account.

Finally, bear in mind that fully-paid brokerage assets are segregated from the brokerage's assets per securities law. SIPC insurance is generally only necessary if the brokerage firm is committing fraud by misappropriating customers' assets. You can read more about the historical track record of SIPC asset recovery at https://www.sipc.org/about-sipc/history.

How can someone insure more than $250,000 in cash?

This is not exactly an everyday problem for most people, but there are several ways to fully insure large amounts of cash.

Use multiple banks

1. The manual approach. This might be impractical for corporations, but in most areas, the amount of cash coming from a home sale (for example) is generally not so high as to require more than a few banks. Even if you are well under the FDIC limits, having accounts at two different financial institutions is useful for backup purposes.

2. Several banks and cash management accounts will automatically spread money across multiple program banks which allows their customers to effectively increase their FDIC insurance coverage beyond the $250,000 limit. While these accounts try to make sure less than $250,000 is kept at any partner bank, they all clearly state that the customer is ultimately responsible for monitoring that their assets at each bank don't exceed FDIC limits (for one thing, they don't know whether you have another bank account elsewhere that is deposited at one of the same banks). If you're using this method, verify that your deposits are spread out properly. Here are several options:

   • Betterment: Allows FDIC coverage of up up $1m ($2m for joint accounts)
   • Fidelity Cash Management: Allows FDIC coverage of up to $5m (in their FDIC Insured Deposit Sweep Program)
   • Wealthfront: Allows FDIC coverage of up to $2m for cash deposits

3. One popular solution for "big money" is IntraFI, formerly known as CDARS (Certificate of Deposit Account Registry Service). IntraFI uses a network of banks to (relatively) seamlessly spread deposits across multiple banks, which effectively increases FDIC insurance coverage well beyond the $250,000 limit.

Use multiple account ownership categories

Remember that thing about "per depositor" and "per account ownership category"? Well, if you have a joint account, it's a different ownership category and it's $250,000 per co-owner. If you're married, that's an easy way to protect $1,000,000 in cash simply by using two separate individual accounts and one joint account.

Add Payable-on-Death (POD) beneficiaries

You can also increase your deposit insurance by adding living POD beneficiaries to your account. A single-owned bank account with 5 living beneficiaries has $1.25 million of insurance. See https://edie.fdic.gov/ for more information. Note that PODs generally take precedence over wills and other estate planning documents.

(Note that the requirements are different for credit unions.)

Private insurance

Some banks also provide additional coverage through third-party insurers, but this is a less commonly used option than spreading deposits across multiple banks.

Invest into low-risk securities

Another option is to consider investing some of the cash in low-risk securities such as Treasury bills, which are backed by the U.S. government and considered extremely safe. You can also invest into US Treasury money market funds, Prime money market funds, and ultra-short duration Treasury ETFs, particularly now that these options pay higher rates and Treasury-only money markets are state tax-exempt. While these options are not FDIC-insured, they are considered relatively safe and may provide an alternative way to spread your risk.

Thanks to /u/karivara and other commenters on this thread from /r/OutOfTheLoop which helped bring me up to speed along with various news sources. I also want to thank /u/Econ0mist, /u/DeluxeXL, /u/antoniosrevenge, /u/Cruian, and /u/yes_its_him who provided helpful feedback to a draft of this post.

Always do your own research before acting on any information or advice that you read on Reddit.