Depositors must not assume the inherent safety of bank deposits. Greater vigilance in entrusting deposits and diversifying should mitigate the risk of losing your money
The failure of Silicon Valley Bank, America’s 16th largest by asset size and one that catered to cash-rich start-ups and venture funds, is causing tremors across the globe. As the contagion spread, it put into perspective not just risk management practices at banks, it also brings to light the darker side of the digitally enabled world and the quick movement of money from one place to another in a matter of seconds that could put an entire financial system in risk.
To be sure, American federal regulators quickly came together to announce that the deposit holders in SVB and another of its New York-headquartered peer, Signature Bank – also on the brink of collapse-, would be protected. It meant that deposit holders will not lose their money, even if the bank does not have the requisite solvent assets to pay them back.
Note, SVB is not a new-age bank, it’s been around for 40 years. Where it slipped up was in the concentration of large-sized deposits, which became an overnight reality thanks to the easy money floating around from the loose monetary policy that kicked in to stem financial pressures arising from the global pandemic. The total deposits for the bank were up 65 per cent in December 2020 compared to December 2019. Annually, deposits were 87 per cent higher as on December 2021 compared to a year ago. This was indeed a steep increase compared to a change of 11 per cent and 24 per cent for the previous two pre-COVID years ending in December.
So the thread ties back to decisions around monetary policy taken with extreme urgency during the start of the pandemic in March 2020. But that’s a discussion for another time. The focus of this column is to bring into perspective one factor– Risk.
Bank Risk vs Individual Risk
Equity market risk is glaring. SVB Financial Services’ – the holding company for SVB – share price went from a value of around USD 600 to roughly USD 300 per share in a year from March 2022 to March 2023, just before the imminent insolvency of the bank and halt in trading of its stock.
Beyond that and the risk of the bank’s mismanagement of assets lies the risk that deposit holders were subject to. For a brief moment, before the federal bailout, there was a real risk that they could lose their hard-earned money forever. Social media was rife with stories of millionaire techies withdrawing their millions in a day from SVB as they got a whiff of the trouble brewing.
NavikEye 