Events over the past few days have left many nervous
But, of course, bank runs tend to do that.
They are, after all, built on fear of fear itself. So news of the rapid demise of Silicon Valley Bank (SVB) and Signature Bank has rattled markets.
What you should know
Even the healthiest banks do not keep enough cash on hand to repay all customers immediately if they demand their deposits all at once.
Bank runs are insidious because they can become self-fulfilling. Fueled by fear, people begin taking out their bank deposits. As word gets out, fear may turn to full-blown panic as the remaining depositors rush to do the same before they are too late and the bank cannot meet their immediate demands.
When a bank fails, depositors are made whole by the FDIC insurance fund. Traditionally, the insurance only covers deposits up to $250,000 (per depositor, per bank- on a joint account coverage is up to $500,000), but a “systemic risk exception” allows FDIC to use the Deposit Insurance Fund to ensure that even those with more than $250,000 don't lose any of their deposits.
In fact, uninsured depositors have been paid out in full in every bank failure going back decades (with the lone exception of IndyMac in 2008). That's not to say you shouldn't care about being insured if you're someone with over $250k (or a couple with over $500k owned jointly) in checking, savings, CDs, and MMDAs at one bank but I think it's important to have full information
So what happened to the customers of SVB and Signature Bank?
On Sunday, Federal regulators — the Fed, Treasury Department, and other agencies —announced that all customers of both SVB and Signature would have access to their money today.
On Monday morning, in Britain, it was announced that HSBC is taking over the British arm of SVB.
While the depositors have been made whole, the equity and bondholders of the banks are not.
That means: people who had savings, checking, and CDs at those banks got (or will get) all of their money back, but people who owned those banks stocks or bonds in their portfolios will now.
These are the risks of investing and why broad-based diversification is so important. If you own stock in one bank, that investment can go to zero, but if you owned a small piece of every bank, it's impossible for every single bank to fail and for you to lose your money.
This holds true for investing in any company and sector- diversification (owning a little bit of a lot of different companies – like thousands and thousands of companies) makes investing inherently less risky.
For investors worried about the safety of their assets, their investments at major custodians are held separately and not comingled with assets of any affiliated Bank.
What that means is if your investments were, say, at Fidelity and Fidelity went out of business, your investments would still be safe and not at risk.
These types of events spawn volatile markets, and we should expect to see that. However, it should not cause long-term investors to panic or lose sight of their goals. These types of events happen, and markets are quick to incorporate them and move on.
If you’ll recall, the S&P 500 lost nearly half its value during the global financial crisis in 2008 but fully recovered within two years, then went on a historic decade-long bull run.
As always, I'm here for you — to offer guidance, answer questions, and calm fears (as best I can).