lessons from a bank failure

Lessons from a Bank Failure

Silicon Valley Bank failed last week when it experienced a “bank run” where many customers who had deposited money all requested to withdraw that money simultaneously.  While the bank had much of its own assets in safe investments like treasury bonds and government-backed mortgage securities, it was vulnerable because it failed to adequately manage other risks.1

Here are some lessons to take away for your own portfolio:

What can we learn from the collapse of a bank?

1. Diversification

One of the most important tenets of investing is not having all your eggs in one basket. Investing in companies from a broad range of industries and sectors can reduce the volatility in your portfolio because different industries experience uncorrelated business cycles. This means highs and lows can occur at different times and balance each other out. Case in point, investors in the S&P 500 had a roughly 0.08% exposure to Silicon Valley Bank, whereas a less diversified investor who invested solely in the S&P Regional Banking industry would have had nearly 30 times that much exposure at 2.38%.2

2. Concentrated Positions and Human Capital

Silicon Valley Bank had a rather homogenous customer base as their customers were mainly tech and health care start-ups and venture capital firms. It would stand to reason that when fundraising for these types of companies dried up, it would affect them all similarly and simultaneously. Essentially, Silicon Valley Bank had a concentrated income source. If you’re still working, you likely have much of your income coming from your employer. Therefore, you should be mindful to diversify your investments not just in relation to each other but in relation to your employer and their business risks.  Contrary to this advice, some investors own a good deal of stock in their employer due to loyalty, familiarity, or possibly other factors like equity compensation. Again, failing to properly manage the risks to your concentrated income source could lead to a scenario where you simultaneously experience a layoff and losses to your portfolio.

3. Time Horizon and Liability-Driven Investing

Silicon Valley Bank needed to make short-term payments (when depositors requested to withdraw their money) but had many assets in long-term securities (like long-term treasuries and mortgage-backed securities). Even though these assets were “safe”, the safety occurs when they are held to maturity, not necessarily over a shorter time period. In your account, it’s prudent to invest in short-term assets for your monthly cash flow needs and longer-term assets like equities for your longer-term needs, like keeping up with inflation and making your portfolio last throughout your life.

4. Insurance

The Federal Deposit Insurance Corporation (FDIC) insures bank deposits up to $250k per depositor. Beyond that limit, deposits rely on the credit of the bank. At TD Ameritrade, your account’s money market portion is actually FDIC-insured up to $500k per account owner (meaning up to $1M for a joint account or a trust with two trustees).3  TD Ameritrade can achieve this by investing your money at multiple FDIC-insured banks on your behalf. It’s also a good reminder to those who like the safety of holding lots of cash that you will want to consider multiple banks to maximize your level of FDIC insurance. Or, consider letting us help you manage that money at TD Ameritrade for its higher level of FDIC insurance or the fact that 6-month treasury bonds (insured by the full faith and credit of the US government) are paying north of 4.5% right now.4

5. Government Bailouts

When certain companies are deemed systemically important institutions, the government may step in to bail them out to prevent a chain reaction of failures and help stabilize the financial system. In the case of Silicon Valley Bank, the government is going to make all depositors whole, even those whose deposits were above the insurance limits.5 Equity and unsecured debt holders, however, won’t be bailed out. When it comes to your own portfolio, invest prudently because the government likely won’t be bailing you out.

While some people are learning these lessons the hard way, our risk management approach to investing gives us confidence in facing life’s uncertainties. Please give us a call if you’d like more information or if you’d like to discuss how these lessons apply to your situation.

Jodi & Mike

Sources and Disclosures

[1] https://www.wsj.com/articles/where-were-the-regulators-as-svb-crashed-35827e1a
[2] Data based on the holdings of SPY and KRE at https://www.ssga.com/us/en/intermediary/etfs/funds/spdr-sp-500-etf-trust-spy and
[3] https://veoone.tdainstitutional.com/#!/aem-content/investment-solutions/cash-management
[4] https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value_month=202303
[5] https://www.cnbc.com/2023/03/12/regulators-unveil-plan-to-stem-damage-from-svb-collapse.html

Integral Investment Advisors, Inc. dba Integral Wealth Management is a Registered Investment Adviser. This material is for informational and illustrative purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Advisory services are only offered to clients or prospective clients where Integral Wealth Management and its representatives are properly licensed or exempt from licensure. The views and opinions expressed in this material reflects the personal opinions, viewpoints, and analyses of Integral Wealth Management employees and/or the individual providing such comments, and should not be regarded as a description of advisory services provided by our firm or performance returns of any our firm’s clients. The views and opinions expressed in this material is subject to change at any time without notice. Nothing in this material constitutes investment advice, performance data, or any recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Our firm manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the material.

This material is developed from sources believed to be providing accurate information; no warranty, expressed or implied is made regarding accuracy, completeness, legality, reliability, or usefulness of any information. Integral Wealth Management may also provide links for your convenience throughout the material to websites produced by other providers of industry-related material. Accessing websites through links directs you away from our content. Our firm is not responsible for errors or omissions in the material on third party websites, and does not necessarily approve of or endorse the information provided. Users who gain access to third party websites may be subject to copyright and other restrictions on use imposed by those providers and assume responsibility and risk from use of those websites.

It is important to note that all investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance is not a guarantee of future results. Our firm urges you to please seek advice from your licensed financial professional prior to making any investment decision.

Scroll to Top