Will the Silicon Valley Bank Collapse Affect your Money?

Disclosure: This post may contain affiliate links. If you click on a link I may make a small commission at no extra cost to you. You can read the full disclosure here.

Last Updated on March 23, 2023 by Chris Panteli

Silicon Valley Bank Collapse

After back-to-back layoffs, the tech industry is running into yet another challenge: collapse of the biggest tech-focused bank, the Silicon Valley Bank (SVB). 

This sudden crash shook up the tech startup world and created panic among cash holders and investors worried about the security of their money. Searches about money safety spiked by 400% in a week!

The recent Silicon Valley Bank collapse has sent shockwaves throughout the tech industry, leaving investors and depositors scrambling to understand the implications for their finances. As the largest tech-focused bank’s downfall raises critical questions about money safety, we delve into the causes and consequences of this financial crisis.

Is your money really in danger? What will happen to your funds? What steps to take next? We asked finance experts all your burning questions. 

What is the Silicon Valley Bank?

Silicon Valley Bank (SVB), a state-chartered commercial bank headquartered in Santa Clara, California, was the preferred bank for nearly half of all venture-backed tech startups. Founded in 1983, it grew alongside the local high-tech economy and expanded into various technology hubs across the United States and internationally.

SVB catered specifically to the tech industry and managed risk by understanding the unique needs of startups, often connecting clients to its extensive network of venture capital, law, and accounting firms. However, in March 2023, amidst a period of global inflation and central bank-endorsed interest rate hikes, the bank faced a run on its deposits, resulting in its collapse and seizure by the California Department of Financial Protection and Innovation (DFPI). This marked the second-largest bank failure in U.S. history.

What’s the big deal about the Silicon Valley Bank?

The Silicon Valley Bank was the 16th largest US bank before it went downhill, says Tom Koesternen, chartered financial analyst at TheGuaranteedLoans. It’s also the largest bank to collapse since 2008 when over 600 banks failed during “The Great Recession.”

SVB was particularly important for the tech industry as it funded nearly half of all US-based tech and healthcare startups. 

Why did the Silicon Valley Bank crash?

Why did the Silicon Valley Bank crash?

SVB was a major bank with significant deposits. It invested a majority of these funds in government bonds which are typically safe, Koesternen says. However, the bonds’ values are inversely proportional to the interest rates so when the Federal Reserve increased the interest rates, the bond values fell, he adds. 

Investors started withdrawing money but the bank couldn’t handle so many sudden withdrawals. “SVB needed more liquidity to repay the deposits because their investments were locked in long-term assets,” Koesternen says. 

In simple words, the bank owes you the money that you previously deposited and the bank might have lost it by the time you want it back, especially if the other customers are withdrawing rapidly, says David Martínez de Lecea, CEO of Exirio, a wealth management app.

That’s what happened with SVB. “The only option left to them was to sell their assets at a loss, causing financial distress to its investors and customers. Once SVB disclosed its sale of assets, the stock value drastically reduced by 60% and the bank collapsed within 48 hours,” Koesternen says. 

Can people withdrawing money rapidly really cause a bank to shut down?

Normally, banks don’t start shutting down immediately when lots of people are withdrawing money. Most banks have cash reserves to protect against such situations. 

Moreover, the Federal Deposit Insurance Corporation (FDIC) insures accounts up to $250,000 per depositor for each account so people don’t lose all their money overnight. 

However, “SVB’s depositors and investors were not individual customers but large companies like Roblox, Roku, Rocket Labs, and Etsy,” Koesternen says. “These entities are outside the purview of the FDIC as the companies spend millions in a month.”

In other words, withdrawals of a few hundred thousand dollars don’t crash a bank but big tech companies withdrawing millions at once caused a rapid depletion of the SVB’s funds.

Is your money safe?

The biggest question for most depositors and investors after the SVB crash was: is my money safe? 

Experts say, yes! 

“As a rule, bank deposits up to $250,000 are insured by the FDIC, but in this case, the federal government announced that all deposit accounts at SVB would be protected and, as such, account holders will be made whole,” says Dr. Bob Wood, professor of finance at the University of South Alabama.

This means if you had any deposits in SVB, you will be reimbursed for your losses and get all your money back. 

This only applies to depositors though. “All depositors will receive every penny they kept with the bank, however, SVB’s owners and investors will not be recouped for their losses,” says Michael Benninger, former credit analyst and now the lead editor of banking at Forbes Advisor. 

How will the SVB crash affect the economy?

When a major bank like the SVB collapses, the entire economy may be at risk. People who aren’t even related to SVB may fear their own bank crashing and rapidly withdraw funds, causing the same problem in different financial institutions and perhaps the system as a whole, Dr. Wood says. “The federal government’s announcement that all depositors in SVB would be made whole was an attempt to mitigate this risk.”

What steps can you take to safeguard the money?

Whether you’re directly affected by the SVB crash or not, experts recommend taking the following steps to keep your money safe in the future.

“Only deposit your money into FDIC-insured institutions, and be careful that your balance doesn’t exceed the FDIC’s limit of $250,000,” Benninger says. “If you need to keep more cash than that in an account, spread your funds across multiple banks or consider opening a cash management account, as those accounts tend to offer coverage limits of up to $2 million.”

“The only possible action for an individual or a business who wants to have a bank account (i.e. 99% of the population) is to diversify risk by spreading their cash among different banks and financial products,” Martínez de Lecea says. 

If you want to keep everything in a single bank, there’s another option. 

Deposits are insured up to $250,000 per depositor per account category so if you have bigger savings, consider restructuring your accounts to take advantage of insurance protection, Koesternen says.  

He explains, “For example, if a person has $400,000 in a single savings account, balances up to $250,000 are insured. The remaining balance is uninsured. But, if the funds were distributed in multiple accounts, like $200,000 in an individual savings account and $200,000 in a joint account with a family member, the entire amount becomes insured because each person in a joint account is insured for up to $250,000.”

Recommended: Why Do Many Banks Consider Student Loans Risky Investments

FAQ

What was the Silicon Valley Bank, and why was it important?

Silicon Valley Bank (SVB) was a state-chartered commercial bank headquartered in Santa Clara, California, that focused on serving the tech industry. It was the 16th largest US bank and funded nearly half of all US-based tech and healthcare startups, making it an important financial institution in the technology sector.

Why did the Silicon Valley Bank collapse?

The collapse of SVB was primarily due to the Federal Reserve increasing interest rates, causing the value of government bonds held by the bank to fall. As investors started withdrawing money, the bank lacked sufficient liquidity to repay the deposits, as their investments were locked in long-term assets. This ultimately led to the bank’s collapse.

Can rapid withdrawals by customers cause a bank to shut down?

Rapid withdrawals by customers can cause a bank to shut down, especially if the bank lacks sufficient cash reserves to handle the withdrawals. In SVB’s case, the issue was exacerbated by the fact that many of its depositors were large tech companies, which withdrew millions at once, rapidly depleting the bank’s funds.

Are the funds of Silicon Valley Bank’s depositors safe after the collapse?

Yes, the funds of SVB’s depositors are safe. The federal government announced that all deposit accounts at SVB would be protected, meaning that depositors will be reimbursed for their losses and get all their money back. However, this protection does not extend to SVB’s owners and investors.

How will the Silicon Valley Bank collapse affect the economy?

The collapse of a major bank like SVB can potentially put the entire economy at risk. People unrelated to SVB may fear their own bank crashing and rapidly withdraw funds, potentially causing similar issues in different financial institutions and the system as a whole. The federal government’s announcement to protect all SVB depositors was an attempt to mitigate this risk.

What steps can be taken to safeguard money in the future?

To safeguard money in the future, consider the following steps:

• Deposit money only into FDIC-insured institutions, and ensure your balance doesn’t exceed the FDIC’s limit of $250,000.

• If you need to keep more cash than the FDIC limit, spread your funds across multiple banks or consider opening a cash management account with higher coverage limits.

• Diversify risk by spreading cash among different banks and financial products.

• Restructure accounts to take advantage of insurance protection by distributing funds in multiple accounts, such as individual and joint accounts, to maximize FDIC coverage.

Silicon Valley Bank Collapse

About The Author

BINGO CASH

You can win up to 
$83 every win; in 2 minutes!

Win cash totally free or deposit $5 for cash tournaments to multiply your winnings
Cash tournaments not available in  AZ, AR, IA, LA, DE, SC
close-link
BINGO CASH: Get Up to $83 Per Win In Minutes 
close-image
Scroll to Top