Caught Any Interesting Banking News Lately?

Though banking news typically sparks little interest in the general public, it was hard to avoid finding out about the collapse of Silicon Valley Bank last week. On Friday, March 10^th, 2023, it became the second-largest bank failure in US history. The largest was when Washington Mutual Bank collapsed in September 2008, heralding the housing crisis.

Anytime a large institution implodes this spectacularly, there are several questions, which we’re going to attempt to answer, as best as we can, with the knowledge currently available.

The first is…

What happened?

Silicon Valley Bank failed for many of the reasons it initially succeeded. It catered to the startups housed within its namesake, and had a similarly high tolerance for risk (especially compared to other banks). Compared to other banks, SVB overinvested relative to its available cash. Worse, they overinvested in long-term bonds at a time when the interest rates of return were low and, when rates rose, those bonds lost value as no one wanted to purchase a bond at a significantly lower rate of return. Once it became apparent that SVB was saddled with some poor investments, their stock dropped significantly.

Of course, if a bank’s stock experiences a significant drop, the depositors lose confidence, and want to pull their cash out. When that happens, you get a “run on the bank”; this is a downward spiral in which customers rush to withdraw their funds, of which, of course, there is not enough available in cash, creating a further drop in confidence, making more customers want to withdraw more money, etc. In this case, there were even reports of branches closing and police being called on customers refusing to leave. Amidst this, the California Department of Financial Protection and Innovation stepped in to close Silicon Valley Bank and appointed the Federal Deposit Insurance Corporation (FDIC) its “Receiver”.

How did all of this affect small businesses?

According to regulatory filings, as of December 31^st 2022, 93% of SVB’s deposits were uninsured. So, for businesses banking with SVB, their deposited funds over $250,000 are not guaranteed to be safe. Furthermore, on Friday, March 10^th, customers could not withdraw funds. This didn’t just affect SVB’s banking customers, but also those working with them. For example, Patriot Payroll, which kept their operating funds with Silicon Valley Bank, could not process payroll for any of their clients on the 10^th, resulting in thousands of those companies’ employees not receiving a paycheck. Rippling, another payroll company, had to move funds around and delay to paying their clients’ employees over the weekend.

BILL (formerly Bill.com) held funds within SVB, and warned of potential delays, though none ended up being reported. Even Etsy had to delay payments to some sellers, due to funds being tied up at Silicon Valley Bank. So, even if a business never banked with SVB, if they used a payroll company who used them, or used a certain bill-pay service, or sold things on Etsy, they could have been affected.

What should I do?

If you banked with SVB, read this press release from the FDIC. If you have never banked with SVB, this can still be a good reminder to “not put all your eggs in one basket”. First, always be sure you’re using a FDIC-insured bank. Secondly, if you have deposited funds over $250,000, spread it across multiple banks (multiple accounts at one bank are not sufficient).

This can also be a good reminder to gain a close understanding of your cash-flow. This isn’t me just telling you to “spend less”. Understand, in-depth, the ins-and-outs of how your money moves. Know which vendors are on auto-payment from which checking accounts or credit cards. Know where your deposits go, how early before payday your payroll is deducted, etc. If you had to switch banks suddenly, would you know everything that needs to be moved over?

How did all of this affect small businesses?

According to regulatory filings, as of December 31^st 2022, 93% of SVB’s deposits were uninsured. So, for businesses banking with SVB, their deposited funds over $250,000 are not guaranteed to be safe. Furthermore, on Friday, March 10^th, customers could not withdraw funds. This didn’t just affect SVB’s banking customers, but also those working with them. For example, Patriot Payroll, which kept their operating funds with Silicon Valley Bank, could not process payroll for any of their clients on the 10^th, resulting in thousands of those companies’ employees not receiving a paycheck. Rippling, another payroll company, had to move funds around and delay to paying their clients’ employees over the weekend.

BILL (formerly Bill.com) held funds within SVB, and warned of potential delays, though none ended up being reported. Even Etsy had to delay payments to some sellers, due to funds being tied up at Silicon Valley Bank. So, even if a business never banked with SVB, if they used a payroll company who used them, or used a certain bill-pay service, or sold things on Etsy, they could have been affected.