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How did a California bank collapse?
FOX 26 Consumer Reporter Tom Zizka takes a look at what happened and what you could do if you're concerned about your money.
HOUSTON - The collapse of California's Silicon Valley Bank is raising questions whether it was a unique problem, or a symptom of more to come. As the second-biggest bank failure in U.S. history, SVB's business was largely tied to lending for the tech industry. The experience is a cautionary tale of how small and regional banks move their money around to keep business going.
BACKGROUND: Silicon Valley Bank seized by regulators
Depositors waited in long lines, outside the bank's California branches, trying to save what they could after a weekend of worry that their money might be lost. From the White House, President Biden sought to reassure the country that a financial fix for the SVB collapse was being managed without the cost of a taxpayer bailout, "Americans can have confidence that the banking system is safe. Your deposits will be there when you need them."
But the dynamics that put the bank in trouble, are not unique. Houston financial strategist Lance Roberts says banks routinely invest a portion of deposits that will earn money, while customers go about their business.
"They had a big portfolio of bonds that they had bought, previously, and as the Fed was aggressively hiking rates, last year, the value of those bonds fell," he says.
As rising interest rates prompted depositors to move billions of dollars into better paying investments, the bank's long-term investments lost value.
MORE: Silicon Valley Bank crisis: Feds move in to help
To illustrate, imagine the bank invested a $100 million in bonds that paid 1%, a year ago. Today, that rate is 5%, which makes the original investment only worth $90 million, leaving the bank $10 million short of what it needs to pay depositors who want their money.
"It's a function of a massive run on the bank, at one time," says Roberts, "People all wanting their money at one moment, and there not being enough collateral, there, to cover it."
Bank stocks are now struggling on Wall Street, with losses focused on smaller and regional banks amid concerns that they, too, could be exposed if there's a sudden demand on cash that's deposited, there. Roberts says there is no indication, for now, that there is a bigger problem on the horizon, "The real risk lies in the regional banks, and it's a function of psychology and panic, more than anything else."
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For those who do have money deposited in a small, or regional bank, there's a good chance of a personal relationship with the people who work there. Roberts suggests having a conversation about the stability of deposits, and moving them to a larger bank if there's a legitimate concern.
As for interest rates, Fed Chairman Jerome Powell indicated, as recently as last week, that consumer spending and robust job creation might prompt the fed to be very aggressive with it's next rate increase. After the SVB collapse, analysts are suggesting the central bank may impose a small hike, or no move at all, to help cool tensions down. The Fed meets, next, March 22.