You may have already seen the headlines about the recent collapse of three U.S. banks: Silicon Valley Bank, Signature Bank, and Silvergate. On the whole, this is a pretty big deal in the financial world. Whenever we entrust our hard-earned money to a bank, we want to know that it’s safe. So, what does this mean for the average person? Should we head for the banks and start hiding money under our mattresses? We don’t think so.
First, we want to let you know what caused these banks to collapse. After that, we will tell you what our custodian, Goldman Sachs Custody Solutions, is doing to keep your cash and investments safe.
Which Banks Collapsed?
As of the writing of this article, three U.S. banks have collapsed. They are, in order of assets, Silicon Valley Bank, Signature Bank, and Silvergate.
What Kinds of Banks Were These?
These banks were highly focused on commercial banking, targeting specific regional and niche markets. In other words, their products and services weren’t for your average Joe. Silicon Valley Bank worked mostly with tech start-up firms. Signature Bank and Silvergate were highly involved in the cryptocurrency space.
What Caused Their Collapse?
Each bank had a somewhat unique situation, but all three follow similar trends. The biggest cause of each failure was a “run on the bank.” This is when bank customers rush to the bank to withdraw their cash. In order to try and meet the demand, each bank had to sell off many of its assets at a loss. In the end, they couldn’t keep up with the demand.
Again, each of these banks was highly concentrated in certain sectors. We call this concentration risk. If you had any tech stocks last year, you likely noticed they did not do so well in 2022. The same is true of cryptocurrency. Because these three banks lacked diversification in multiple sectors, all it took was one bad year.
Could This Happen to My Bank?
It is unlikely your bank is facing the same situation. Most major and regional retail banks have a more diverse mix of retail and commercial clients. In other words, they are not just loaning money and offering banking services to tech start-ups and cryptocurrency firms. Their clientele includes everyday people and a large variety of local, regional, and national businesses. Therefore, we do not recommend making a run on your bank.
You Manage My Money Through Goldman Sachs…What are They Doing to Keep My Money Safe?
Goldman Sachs offers protection to you through two types of insurance: The Federal Deposit Insurance Corporation (FDIC) and the Securities Investor Protection Corporation (SIPC).
How Does FDIC Protect Me?
FDIC insurance typically offers $250,000 of protection per account. In the event of a bank failure, FDIC will reimburse you up to $250,000 of the money within the account.
Goldman Sachs Custody Solutions takes this a step further. Through their sweep program, they have agreements with more than a dozen banks. This allows them to offer FDIC protection for up to $4.5 million for individual accounts and $9 million for joint accounts.
How Does SIPC Protect Me?
SIPC offers protection in the event of a brokerage firm failure. Note, this does NOT protect you in the event of a market downturn or if a stock were to fail. Instead, protections of up to $500,000 per account is provided in the event of a firm’s collapse, which includes up to $250,000 in cash.
Now, some of you may have more than $500,000 worth of investments. Does that mean you are exposed to significant risk? Again, Goldman Sachs goes above and beyond in this area. They have purchased additional customer securities insurance. As such, they provide protection of up to $10 million per account, with maximum protection of up to $50 million.
In conclusion, there is little reason to believe your local bank is facing the same situation. There are a lot of headlines that inspire fear. However, there are several factors that led to the collapse of these banks, including a lack of diversification, mismanagement of investments, and the inability to liquidate when necessary.
Therefore, we do not recommend withdrawing all of your money from your bank. It is unlikely that your bank is in the same boat as the three mentioned earlier.
If you have any questions, please feel free to contact us at (540) 904-1670 or at [email protected].