Is your money safe in the bank?

By Mike Ross

The news over the last two weeks has been dominated by the collapse of Silicon Valley Bank (SVB) in the US, and the flow-on effects to other banks, both in the US and globally. In recent days, the global banking problem-child Credit Suisse (which seems to bounce from one crisis to the next) had to be bailed out by competitor UBS as it too saw significant deposit outflows. Only time will tell if more banks will face similar fates.

Why did Silicon Valley Bank fail?

The plight of SVB is fascinating, as some of the economic impacts of the pandemic have caused a perfect storm. SVB was the 16th largest bank in the US. In Silicon Valley, the birthplace of many major technology businesses, SVB was a major player in providing banking services to an estimated half of all start-up companies in the region.

After the pandemic, with interest rates at record lows, investors piled money into start-up technology businesses, who in turn held the money in SVB. SVB invested this money into long-term government (and other high-quality) bonds which have fallen in value significantly as interest rates have risen. During the past year, funding for start-up businesses also dried up which has caused steady withdrawals from SVB. To fund these withdrawals, the bank had to sell some of its bond holdings at a loss.

When customers heard about these losses, they began to quickly withdraw their funds, causing a
bank run and leaving SVB insolvent. In the US, bank deposits are insured by the government up to $250,000, but most (94%) of the deposits at SVB were over this threshold meaning many businesses that held their money there could have folded due to the bank's collapse. Fearing a broader banking crisis, the US Federal Reserve stepped in and guaranteed all depositors at SVB, as well as a number of other US banks which have suffered from the flow-on effects.

For more on SVB including the numerous parties that bear some responsibility,  this article by Michael Batnick provides a great summary. There’s plenty of blame to go around!

Should you be worried?

Banking problems strike a different level of fear for savers. If you invest in shares, you understand there is risk and that the value of your investments will fall at times. But when you put your money in the bank there is an assumption that it's safe. And despite the events of the past two weeks, the evidence firmly suggests that your money in the bank is safe. According to financial commentator Ben Carlson, no depositor has lost money in a US FDIC-insured bank since 1933. In New Zealand, there are (currently) no explicit guarantees in place on deposits at NZ banks, but the strongly held view is that the RBNZ would step in and guarantee deposits if a bank were to collapse. NZ banks are also well-regulated (and very profitable!) by global standards.

As a saver, particularly if you have a significant amount of cash in the bank, you can spread your savings across various accounts or term deposits at different banks to diversify the small risk from these deposits, and provide peace of mind. You can also consider diversifying into different investments such as government or high-quality corporate bonds.

One word of warning

While banks are still relatively safe, non-banks (examples include General Finance and Xceda Finance) can also offer ‘term deposits’ and these investments can be a lot riskier than you might assume from the name. As interest rates have increased, some of these non-bank deposit takers have aggressively advertised their term deposit rates of 7%+ on social media. Non-bank deposit takers are regulated but that doesn’t speak to how safe they are. A ‘B’ credit rating doesn’t sound bad, but dig a little deeper and you’ll see that it implies a more than 20% potential of default over a 5-year period. It's a more than 20% chance of losing some or all of your initial investment during that five-year timeframe. That’s not like having your money in the bank!

Disclaimer: This article is general in nature and does not constitute financial, tax or legal advice in any way. Should you require such advice, please contact Evergreen Advice or a suitably qualified professional.