Why Silicon Valley Bank and Signature Bank Failed and What To Do About It

Are you wondering what is going on with the recent failure of Silicon Valley Bank and Signature Bank…which happen to be the 2nd and 3rd largest banks to fail in U.S. history?

I was too, so I looked it up this morning and got some great info from Wikipedia, and other sources.

Basically both banks failed to protect themselves from rising interest rates. It’s common knowledge that as interest rates rise, the value of long term bonds goes down. The opposite is also true, when interest rates decrease the value of long term bonds increases.

Both banks put a large portion of their bank reserves in long term treasury bonds, without protecting against an environment of interest rate hikes.

Specifically, Silicon Valley Bank had a large number of venture capital firms and tech industry clients who have been withdrawing their deposits due to the higher interest they are paying on their loans. The deposits led the to bank having to sell long term US treasuries at a loss. The news led to a bank run which led the bank being shut down and taken over by the FDIC.

Signature Bank had a large number of cryptcurrency exchanges and companies as it’s clients. When FTX cryptocurrency exchange went bankrupt, a lot of cryptocurrency exchanges has their clients withdrawing their funds. This led to the same situation where Signature Bank had to sell their long term treasuries at a loss. The news got out…bank run…taken over by the FDIC.

This is a simplified version but this is basically what is happenning. Banks that are in trouble have exposure to the U.S. recent interest hikes, which are happenning to fight inflation. They are not sufficiently protected against this risk.

What do you do about it?

You can diversify and protect yourself against any risk you have in your own assets to interest rates (and any other factors).

Don’t put all your money in one bank. Understand whether your bank is FDIC insured or not. The limit of coverage is up to $250,000.

Hedge against rising interest rates and falling interest rates yourself by putting your money into short term and long term treasury bonds directly with the U.S. Treasury or with a brockerage firm.

Have some money in cash.

Real Estate is another store of wealth and can also create cash flow if managed wisely.

Educate yourself and find your own strategy.