Question of the Week
What the Recent Bank Closures Mean For You
Happy Friday. What a week, huh? For you S-Corps, we had the 1120-S deadline and on top of that the major economic news of three bank failures. I’ve had clients anxiously asking if they were okay. And I imagine hearing about the collapse on the news and seeing it in all major social media outlets brings up a good amount of fear and anxiety for a lot of you too.
So today, I want to walk you through what happened, what it means for you, and what you can do.
On Wednesday, March 8th, Silvergate, a California-based bank that made loans to cryptocurrency companies, announced that it was to cease operation and liquidate its asset. The following Friday, Silicon Valley Bank (SVB) failed. And then, on Sunday, Signature Bank was shut down by New York bank regulators. That made three significant bank failures within a week and put a lot of people on edge.
The Federal Deposit Insurance Corporation (FDIC), which insures bank deposits and took over Silicon Valley Bank on Friday, put $175 billion in customer deposits under its control. SVB’s failure was the largest since the financial crisis of 2008. And while the FDIC insures customer deposits up to $250,000, the bank had many accounts over that limit – so there was no guarantee that those clients, including small businesses, would receive their money in full.
Similarly, Signature Bank had a large number of uninsured deposits. As a result, the Federal Reserve, Treasury, and FDIC announced in a joint statement that “no losses associated with Silicon Valley Bank will be borne by the taxpayer” and would make depositors at Signature bank whole.
The FDIC usually is supposed to clean up banking as cheaply as possible, but it made an exception to this rule given the risk to the financial system.
What does this mean for you?
If you didn’t have deposits at Signature Bank or SVB, the closures don’t mean anything to you. But I imagine you are asking this question from a global perspective of whether the financial system is falling apart. We continue to hear news of a coming recession, massive layoffs in tech, and now bank failures. Are we headed to another 2008?
No one knows the answer to that question. But to put that closure into perspective, our bank system is a $23 trillion banking system. So logically, the amount of the loss and the government shoring up the system should stop any large-scale domino effect.
Additionally, keep in mind that from 2008 to 2015, 500 federally insured banks failed, including Washington Mutual and investment banks Lehman Brothers and Bear Stearns. This crisis shook the financial industry to its core, yet we still made our way through it.
Lastly, fewer banks have gone under in recent years, despite a global pandemic, primarily due to stronger regulations since the Great Recession. Hopefully, we will continue to learn lessons from these failures, so the ramifications aren’t as significant.
What can you do?
As I mentioned, no one can predict the future, and many things happen in the financial industry that we can’t control. So I suggest we focus on what we can. And that’s keeping the focus on your financial situation.
- Do you have an adequate emergency fund?
- Are your savings spread across accounts or banks if you’re above the $250,000 deposit limit?
- Are you in a diversified portfolio that offers SPIC protection?
- Do you have proper insurance otherwise – home, life, auto, disability, etc.?
You won’t ever be able to avoid all risks. But focusing on your specific financial situation and what you can control will give you the best possibility of weathering these economic storms.
Quote of the Week
“Freedom is the only worthy goal in life. It is won by disregarding things that lie beyond our control.”
Task of the Week
If you’re feeling anxious about the world, take some time this weekend to check in on your financial situation. Creating awareness around your strengths and areas of improvement can help guide you on the next right step. And don’t forget to reach out to your financial advisor if you need help assessing where you are. We’re here to help!