SVB’s ‘significant deterioration’
SVB was founded in 1983 and has long positioned itself as a "partner for the innovation economy.”
Its model included offering high interest rates on deposits to attract customers. It then invested those deposits in long-term Treasury bonds and mortgage-backed securities.
But the value of the bank’s investments plummeted as interest rates rose, forcing SVB to sell its $21-billion bond portfolio at a loss of $1.8 billion in order to cover withdrawals from its customers.
When CEO Greg Becker revealed that loss in a Q1 2023 investor letter on Wednesday, March 8, it triggered a panic-driven bank run. Investors and depositors tried to pull $42 billion from the bank the next day alone, according to Bloomberg.
Unable to meet its financial obligations, SVB was shut down by the California Department of Financial Protection and Innovation on Friday, March 10, and was placed into receivership by the Federal Deposit Insurance Corporation (FDIC).
On Monday, March 13, the FDIC transferred all deposits, insured and uninsured, into a newly created, full-service, FDIC-operated “bridge bank” to give depositors “full access to their money.”
Moody’s didn’t officially downgrade the bank to its lowest credit rating class of C until Friday, when it also withdrew SVB’s rating “for business reasons.”
SVB failed because of “weak governance” and failure to manage risks, Moody’s explained on March 10.
“The significant deterioration in SVB's funding and profitability profile reflects high risk in its financial strategy and risk management,” the agency said.
When asked by The Street as to why it rated the bank the way it did despite significant warning signs, a Moody’s spokesperson explained the rating system but gave no further comment.
This has caused some critics to point out similarities to the 2008 financial crisis, when the credit-rating industry was accused of failing to deliver unbiased financial information due to acute conflicts of interest.
In particular, critics raised concerns about the “issuer-pay” business model, in which banks pay agencies to rate and assess their products.
One takeaway from SVB’s unfortunate demise is the importance of due diligence. Here are three steps you can take to manage your money risk.
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Find a bank you trust
After witnessing the second-largest bank failure in the U.S., hiding your hard-earned cash under the mattress might not seem like such a bad idea.
But don’t let SVB’s collapse ruin your trust in banks. If you do your research and apply the right due diligence, you can find the right bank for you.
The first thing you should look for is a bank or credit union that is insured. Most banks are insured by the FDIC, while credit unions are insured by the National Credit Union Administration (NCUA). In the event of a bank failure, one of those organizations should ensure your money is safe.
You can also research financial institutions through the FDIC and the Consumer Financial Protection Bureau (CFPB). You can also rely on a financial news outlet you trust with well-researched articles that make it easier to understand than the complex financial jargon offered by credit agencies and other industry institutions.
Most banks offer multiple services to help you manage and grow your money. For instance, a high-yield checking or savings account is typically a trustworthy and profitable place to keep your funds.
There are also options out there for free checking accounts to help you save hundreds of dollars in fees.
If you’re unsure about the right option for you, it might be worth getting some advice from a vetted financial adviser or planner who can help you understand your options.
Don’t put all your eggs in one basket
If you don’t feel comfortable keeping all of your money in one bank, you should consider diversifying by spreading your money among a few different institutions you trust.
You should also consider how you can put your money to work, beyond just storing it in a bank.
For instance, you may want to invest in stocks or real estate, either physically or through real estate investment trusts (REITs).
Before jumping into investments and stock trading, it is important to do your due diligence so that you understand a variety of factors, including company capitalization, revenue, valuations, competitors, management, and risks.
There are beginner-friendly platforms that do the trading work for you and make it easy to invest with small amounts if you want to dip your toe into the investing world.
Transfer your risk with insurance
Even if you’ve made the best possible banking and investment decisions, it’s still important to protect yourself against unexpected financial losses.
For instance, homeowners’ or renters’ insurance can protect you from the costs of unforeseen events such as fire or theft.
You might also consider getting umbrella liability insurance, which will protect you in case your home or auto insurance coverage become exhausted.
With the cost of health care increasing in the U.S., it is also important to secure adequate health and disability insurance or set aside money to cover a health emergency.
These protections should help you to rest easy even in times of financial uncertainty.
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