(This column originally appeared in the Philadelphia Inquirer)
In the aftermath of Silicon Valley Bank’s bankruptcy — and troubles reported by a handful of other regional banks — many of my clients have been asking whether they should be concerned about the safety of the money they have on deposit with their bank. The answer is: probably not.
“Silicon Valley Bank was not an institution that had a bunch of problem loans,” said Charlie Crawford, the CEO of Hyperion Bank in Philadelphia. “It wasn’t a bank that lacked capital. It was the victim of a classic run on the bank from a liquidity crisis.”
Silicon Valley Bank had experienced a significant increase in deposits, thanks to its many local customers that saw their cash significantly increase from venture capital and other investors leveraging the technology boom. The bank’s management team invested much of that excess cash in a safe vehicle: U.S. Treasuries. But they misjudged one big thing: interest rates.
To achieve a reasonable “yield” — or return on those assets — the market value of those Treasuries decline as interest rates increase. Most investment managers understand this. But the problem is that to fully realize the return on those investments, you need to hold them until maturity. Otherwise, you may have to sell at a loss. With investment capital drying up in the tech industry, many of Silicon Valley Bank’s depositors demanded more money to fund their operations. Unfortunately, not enough of the bank’s cash was liquid, so when word got out about the bank’s miscalculation, there was a run.
“People panicked,” Crawford said. “They wanted their money back.”
John Coleman, the CEO of Tioga Franklin Savings Bank in Philadelphia, also believes that Silicon Valley Bank’s troubles are “not systemic.”
“We’ll see some credit downgrades, but the regulators will have them on a watch list, and I don’t believe this is a problem like we had in 2008,” he said.
Regardless of these explanations, could your business still be a victim of a similar bank failure? Hopefully not.
But it’s important to take some steps to protect your cash over and above the $250,000 that is covered by the Federal Deposit Insurance Corp. (FDIC).
Get added insurance
Crawford recommends banking with an institution that’s a member of IntraFi, an organization that services financial institutions and that can enable banks — for a fee — to provide an extra level of insurance to their customers over and above what the FDIC covers. It works by spreading a customer’s deposits among many of its member banks to diversify the risk.
“It’s a consortium where we can provide insurance up to about $150 million for some customers,” Crawford said. “And at the end of the month, they get a statement showing their balances and it shows and lists all the other banks that are providing the insurance behind the scenes.”
Financial experts also agree that spreading your money in different places is the best way to protect yourself against a potential bank failure. Even if your bank doesn’t participate in a network like IntraFi’s, you can still take steps on your own.
For example, you can sweep as much as possible into U.S. securities funds that buy Treasuries, which are safe and have yields as high as 4.6%. Just be careful not to make the same mistakes as Silicon Valley Bank and invest too much of your cash in those assets, because if you have to sell before maturity you might lose money.
Another strategy to protect your cash and earn a good return is to invest your money in various bank certificates of deposits (CDs) with multiple maturity dates based on your cash needs, a practice commonly known as “laddering.” CDs are also not liquid so again you have to calculate how much of your money you want to tie up for the long term.
“We’ve been recommending this practice to some of our clients to help them diversify,” Crawford said. “Although most of the cash is held by different banks, we think it’s a great way to help them protect their assets.”
Consider a smaller institution
While some businesses may be tempted to protect their assets by moving their cash to a larger financial institution, many others are wary of doing this. (Silicon Valley Bank, for example, was the nation’s 16th largest financial institution.) Instead, they are strengthening their relationships with community and independent banks in the area.
“I like to ask business people, ‘Who is your banker?’ and 99% of the time they’ll tell me the name of their institution,” Crawford said. “I’ll then say, ‘I didn’t ask for the name of your bank; I asked who is your banker.’ And most of the time they can’t identify an actual person.”
Although Silicon Valley Bank customers have had a rough go lately, smaller banks like Hyperion and Tioga have seen more interest and an influx of deposits. Why? No institution is without risk, but because well-run community and independent banks like them have a closer relationship with their customers, they are able to communicate and respond faster when needs arise.
“We’re talking to our customers all the time,” Crawford said. “We tell them how we’re doing and the decisions we’re making. We also know what challenges our customers are dealing with and we are able to prepare for that.”