What the Silicon Valley Bank Collapse Means for Your Retirement Funds, #141
The second-largest bank collapse in US history occurred on March 10th, 2023 at Silicon Valley Bank. Two days later, Signature Bank experienced the third-largest collapse. In the wake of these financial shockwaves, people are concerned about the impact of these events on their retirement funds. On this episode, I’m breaking down how banks default, what happened with SVB and Signature Bank, and how you can protect your money from failing banks.
You will want to hear this episode if you are interested in...
Digging into the recent banking debacle [2:16]
Understanding bank defaults [6:03]
Protecting yourself from failing banks [8:33]
The impact of bank defaults on retirement funds [11:19]
Understanding a financial disaster
If you’ve had access to the news at any point in the last few weeks, you’ve probably seen that California-based Silicon Valley Bank (SVB) and New York City-based Signature bank experienced the second and third-largest banking collapses in U.S. history, respectively. SVB predominantly served the tech companies and venture capital funds that Silicon Valley is known for. That niche led to $140 billion in unusual growth between Q1 of 2020 and Q1 of 2022.
As you may already know, the money banks safeguard doesn’t lie dormant. Financial institutions use the funds to make investments, like the U.S. savings bonds SVB had their money in. Due to the recent historic and meteoric rise in interest rates, the value of savings bonds has dropped well below their initial value. As a result, SVB’s investors began demanding their money. All while the struggling tech companies SVB services were in desperate need of more funding, causing the bank to sell more of these treasuries at a loss. The perfect storm created enough concern for the bank’s stability that companies pulled their money out left and right. SVB collapsed within 48 hours because it could not meet the estimated $42 billion demands of its patrons.
Keep your money safe
The collapse of a bank is not something you see every day. In fact, zero banks collapsed in 2021 and 2022, and only four collapsed between 2019 and 2020. Even though banking defaults are unlikely, the small chance has many people wondering how to keep their money safe. Especially their retirement funds. It’s estimated that 94% of SVB depositors were over the $250,000 per person per bank FDIC limit. Many of the bank's clients were large companies that used the institution for payroll. If the Federal Reserve hadn’t allowed that limit to be exceeded as of March 13th, we would be looking at a banking catastrophe.
The best way to protect yourself from failing banks is to know the $250,000 FDIC limit. That means spouses are jointly insured for up to $500,000 of deposited funds. If you have more than that, you should double-check your bank’s limit and switch if they can’t accommodate your financial situation. The long-term impact of these events on retirement funds should be minimal. However, the short-term impact is still being felt as volatile markets ride a rollercoaster in the aftermath. Listen to this episode for more on the recent banking defaults and how you can keep your money safe!
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