(5 minutes to read)
It’s still shocking that two trusted banks with close ties to the Bay Area and tech industry collapsed in a matter of weeks. It's a stark reminder that your financial security can shift rapidly, and it emphasizes the importance of being prepared.
Both First Republic Bank and Silicon Valley Bank served our business over the years. As a loyal client of First Republic Bank, I watched their struggles unfold, while maintaining our business deposits in a show of support. But that didn’t stop the loss of confidence that led to First Republic’s demise. Silicon Valley Bank—ironically, the preferred bank for many startups, including startups I worked for—also struggled with a loss of confidence, falling victim to the first ever social-media-fueled bank run. Now, both banks are history.
Multiple factors led to their downfall: escalating interest rates, an abundance of uninsured deposits, investments in long-term bonds highly sensitive to interest rate spikes, attractively priced jumbo home loans, and an inherently unstable business model that funds long-term loans with short-term deposits, which can spark bank runs in the absence of deposit insurance.
However, the precise reasons for these bank failures aren’t the important focus. The point is, they’re gone. And no one saw it coming. It's an unsettling personal experience for me, having known many wonderful, dedicated, and skilled professionals from both banks. And it’s an unsettling experience for everyone, as we tend to expect more security in such institutions.
The important lesson to draw from these recent bank failures is the necessity of keeping your financial house in good order to be prepared for unforeseen shocks in the economy and financial markets.
You can help protect yourself in the following ways.
Understand and utilize FDIC deposit insurance
Our balances at First Republic, and those of our clients, remained below the Federal Deposit Insurance Corporation (FDIC) limits and therefore were never at risk. However, many smart people didn’t know, didn’t remember, or didn’t care about this important rule and got caught up in the bank runs, putting their personal and corporate assets at risk. A key reminder and takeaway from this episode is to always keep your bank or credit union balances, including any money deposited in internet banks, under deposit insurance limits, and have absolute clarity on what is protected. You may need to keep your funds in multiple institutions to ensure all your cash is insured. Money market mutual funds can be another option.
The FDIC provides deposit insurance for banks, and the National Credit Union Share Insurance Fund (NCUSIF), operated by the National Credit Union Association, provides deposit insurance for credit unions. The standard insurance amount is $250,000 per depositor, per insured bank or credit union, for each account ownership category. The FDIC and NCUSIF rules for figuring out which accounts are covered and how much is covered can be confusing, particularly in the case of accounts other than simple individual or joint accounts, such as trust accounts. To ensure clarity over what money is protected, ask your bank or credit union representative about how the rules apply to your specific situation.
Avoid concentrated stock positions
Stockholders of both banks were wiped out when they were taken over by the FDIC. That included employee stockholders, whose equity compensation, such as stock options, restricted stock, restricted stock units, and performance units, all became worthless. This is an important reminder that having too much of your personal net worth tied up in employer stock puts your financial future at risk. Selling your company stock when you are able and investing the proceeds in a many-stock portfolio is the only sure way to reduce your risk.
This also highlights how quickly a company's fortunes can change. The bank failures occurred within weeks, and the same volatility can be observed in technology, biotech, and life science industries. Factors such as new technologies, emerging competitors, regulatory rejections, or a significant drop in earnings can cause a company's stock price to plummet within days, hours, or even minutes. It is essential to be prepared by intentionally reducing your concentrated stock positions to align with your financial security goals.
Diversify your investments
Maintaining a diversified investment portfolio is crucial to securing your future income. The failure of any one particular company, or even two, won’t have much impact on the value of a well-diversified investment portfolio.
For instance, according to holdings records from iShares Russell 3000 ETF (NYSE: IWV) at the end of 2022, First Republic Bank represented just 0.06% of the value of the Russell 3000 Index, and Silicon Valley Bank represented just 0.04%. The Russell 3000 Index measures the performance of, and includes about 98% of, the value of the US stock market. Together the two banks made up only about 0.10% of the value of that market. When those two stocks became worthless, the impact on a well-built investment portfolio was negligible.
In addition, a recent article by investment firm Dimensional Fund Advisors highlights that even the entire US regional bank industry subgroup represents just 1.70% of the Russell 3000. Poor stock market performance by regional banks over the last few months has had minimal impact on the overall performance of a diversified mix of investments. Banking sector woes in the US had even less impact on a globally diversified portfolio.
The sudden collapse of these well-known banks serves as a reminder that financial shocks can occur. To maintain your financial security, it is crucial to draw important lessons from these events:
Keep bank and credit union balances below deposit insurance limits.
Minimize the amount of your net worth tied up in your employer’s stock, when possible.
Invest in a well-diversified mix of stocks.
By implementing these strategies, you can better protect yourself from unforeseen financial crises and ensure your long-term financial well-being.
Parkworth Wealth Management provides holistic wealth management services including financial planning, equity compensation planning, investment management, tax planning, and others, on a fee-only basis and as a fiduciary, acting in clients’ best interests. If you’d like to rethink your financial security in light of the First Republic Bank and Silicon Valley Bank collapse, schedule a complimentary consultation.
