Posts made in March 2023

How the Federal Deposit Insurance Corporation (FDIC) Works

Aftermath of Silicon Valley and Signature Bank

In the aftermath of Silicon Valley Bank/Signature Bank take over by the FDIC, I thought it would be a good time to review the FDIC rules for insurance on bank accounts.  All accounts for all depositors are covered up to $250,000. Should the FDIC take over a bank, the $250,000 coverage should provide for very quick access to your funds.  Let's look in the next few days to find out how quick the actual access is.  


FDIC is a government agency. The FDIC guarantee is backed up by the federal government. The FDIC insurance is federal backing of your account at a bank. Please be aware that we utilize in your investment account a government money market fund. Your cash deposits are invested in US federal government securities. There is essentially no limit to US government coverage because the US government securities are backed by the full faith and credit of the United States government.  


The Federal government has also announced that they will provide insurance coverage on amounts above $250,000 for the involved banks.  It is the intent of the Federal government to reimburse all depositors for the full amount. Again, we will watch to see how quickly the over $250,000 accounts are covered. The law is clear that $250,000 is the limit. The Federal government is using emergency powers to provide coverage over $250,000.  


To our knowledge, none of our clients have deposits with Silicon Valley Bank or any of the other banks that are named in the press reports on this matter.   


As part of our investment strategy and our overall investment plan with you, you may recall that we recommend that your cash reserves be held in a manner that you can get access to the funds immediately. We do not recommend CDs or any investment with a restriction on your access to the funds. Typically, we are concerned about financial emergencies such as repairs around the house, boilers breaking, cars dying, a family member needing financial support.  We should add to our list of concerns bank insolvency.   


We are going to watch closely and see how quickly the FDIC is able to provide access to funds for all the depositors at Silicon Valley or Signature Bank. We will continue to utilize US government money market funds, so our clients don't have to worry about the $250,000 limit and can get access to their funds on a same-day basis in an unlimited amount.   


As always, please contact us with any questions.  

Silicon Valley Bank – Run on a Bank Explained

For most of us, the words “bank failure” immediately trigger the same recent memory: the financial crisis of 2008. That was a year no investor could ever forget. The year some of the largest, most storied financial institutions in the world — think Lehman Brothers, Bear Stearns, and others — collapsed, never to return.

Similarly, for anyone who has studied history, the words “run on the bank” immediately trigger images of the early days of the Great Depression. For others, it’s perhaps scenes from It’s a Wonderful Life.  (Or Mary Poppins, if you prefer.Dramatic moments now consigned to the waste bin of time. Surely not something that could happen in this day and age.

But on Friday, March 10, all these words — bank failure, bank run – happened to the Silicon Valley Bank in northern California. It’s an event that has many investors, scarred by the memory of 2008, wondering if the same thing could happen to other banks.  An event that has only added to the fearful mood currently pervading the markets.

As you probably know, when the news broke on Friday morning, all three major indices immediately tumbled, capping off a rough week for the markets.  So, I want to briefly explain what’s going on with this semi-obscure bank and why it spooked investors.  Then, I want to go over what we can learn from it. 

Prior to collapsing, Silicon Valley Bank was the 16th largest in the country, holding approximately $209 billion in assets.1  If you’ve never heard of it before, it’s probably because the bank specialized in lending money to start-up companies; the kind of fledgling tech firms Silicon Valley breeds each year.  Now, it has the dubious distinction of being the largest bank to fail since 2008.1 

So how did a bank this large fail so suddenly?  Truth be told, it’s a tale that anyone who lived through 2008 also remembers well: The bank simply made too many bad decisions at precisely the wrong time.  During the pandemic, tech companies saw a surge in business.  This led to a host of new, hopeful tech companies popping up, each flush with venture capital.  As a result, banks that specialize in serving these types of companies enjoyed their own surge: A surge in deposits. 

Silicon Valley Bank (SVB) was one of these banks.  But while business was booming, this was also when the problems started.  You see, like most banks, SVB only keeps a fraction of its deposits in-house at any given time.  The rest is lent out or invested.  In this case, SVB purchased tens of billions of dollars in U.S. Treasury bonds. 

To be fair, there was a certain logic here.  Treasury bonds are historically seen as one of the safest investments in the world.  Given the market uncertainty we saw during the pandemic, the bank probably thought it was being prudent with customers’ money.  Unfortunately, the bank forgot one important detail: While Treasurys don’t usually see the kind of volatility that stocks or other securities do, they are vulnerable to a very specific kind of risk.  The risk of rising interest rates.

While this was going on, the economy started changing.  Inflation skyrocketed.  Interest rates, in turn, rose to the highest levels in decades.  That meant all those Treasurys purchased when interest rates were low were suddenly far less valuable.  (Newer government bonds pay far more in interest than those purchased before the rate hikes began.)  At the same time, those tech companies that profited during the pandemic saw business – and their stock prices – fall.  For SVB, that meant fewer and fewer deposits coming in.  Suddenly, SVB was faced with a nightmare scenario: A lack of liquidity and a lack of new funds. 

None of that might have mattered so long as customers didn’t start withdrawing their money.  Of course, that’s exactly what happened.  Faced with their own economic distress, all those tech companies – and their executives – started asking for their money back.  Given that they only kept a fraction of that money in reserve, SVB had no choice but to sell its investments at a major discount.  The result was a major loss of nearly $2 billion, which the bank revealed earlier in the week.1

When news of the situation got out, customers began panicking.  This led to a classic, seldom-seen-but-much-feared scenario: A run on the bank. 

In the days that followed, the bank was unable to stop the bleeding.  So, on Friday, the government stepped in and took control of the bank’s remaining $175 billion in customer deposits.2

Okay.  That’s the story.  But why the impact on the markets? 

Aside from being eerily similar to 2008 – a bank makes risky financial decisions at the exact wrong time and crumbles – the situation has investors wondering if there are other banks out there that might soon experience the same problem.  No surprise, then, that shares of banks with similar business models have fallen sharply over the last two days. 

But it’s more than that.  Right now, investors are gripped with fears of a recession.  On the surface, that may seem counterintuitive, as most areas of the economy remain in decent health.  But until the economy cools down, inflation will continue to run hot…which means the Federal Reserve will continue to raise interest rates.  (Indeed, the Fed chairman announced on March 8 that he expects rates to rise “higher than previously anticipated.”)3

With each rate hike, the threat of a recession grows larger. 

Right now, investors are hyper-sensitive to anything that looks like the first sign of a recession.  And the failure of a major bank certainly qualifies.  Hence the turmoil we’ve seen in the markets this week.  Hence the volatility we may keep seeing. 

So, what can we learn from this?  To my mind, there are a few lessons:

1.      When making investing decisions, always prioritize your long-term goals.  In the wake of the pandemic, SVB made too many short-term decisions that locked up its long-term options.  We will never do that.  Here at Vaughan & Co. Securities, Inc., our approach will always be to take the slower-but-surer path to your financial goals.  We will always emulate the tortoise, not the hare.

2.      Never forget the importance of liquidity.  We are not a bank.  We are human beings, and human beings must contend with the unexpected.  That means we sometimes need quick access to our money.  That’s why we will always invest, save, and plan accordingly. 

3.      Hold to our long-term strategy and never invest based on stories or emotions.  Right now, too many investors are trying to divine when a recession will strike.  They are overreacting to every headline.  We won’t do that, either.   

We are experiencing a time of uncertainty in the markets.  Such times are rarely fun, but they’re not unexpected.  The good news is that my team and I continue to have confidence in both our long-term strategy and the road you are taking toward your financial goals.  We will continue to monitor the markets very carefully and keep you updated on what’s going on.

In the meantime, please let me know if you have any questions or concerns.  We are always here for you.  Have a great month!

In addition to this blog post, we have released a podcast episode “Silicon Valley Bank – Market Minutes No. 2”. Click here to listen now.


1 “Silicon Valley Bank Closed by Regulators, FDIC Takes Control,” The Wall Street Journal, March 10, 2023.

2 “Silicon Valley Bank Fails After Run by Venture Capital Customers,” The NY Times, March 10, 2023.

3 “Fed Chair Powell says interest rates are ‘likely to be higher’ than previously anticipated,” CNBC, March 7, 2023.