What really happened to Silicon Valley Bank?

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The U.S. Treasury, Federal Reserve, and the Federal Deposit Insurance Corporation (FDIC) took decisive action over the weekend in an effort to shore up the public’s confidence in the U.S. banking system. This comes after the closure of Silicon Valley Bank (SVB) on Friday and Signature Bank on Sunday.

Secretary of the Treasury Janet Yellen guaranteed the bank deposits of both closed banks fully, meaning they are resolving the institutions in a way that will provide enough assets to cover all depositors. Yellen’s announcement means depositor’s will have access to all their money, even deposits that exceed the FDIC cap of $250,000.

President Biden and Treasury officials have said that taxpayers will not foot the bill for any losses associated with the resolution of either bank.

What Happened to Silicon Valley Bank?

On Sunday, the Fed announced the official closing of SVB after taking control of it on Friday. Though it was the 16th largest bank in the country, SVB was not well-known outside startup and venture capital circles — or the region after which it was named.

SVB was a state-chartered bank headquartered in Santa Clara, California. A self-described “partner for the innovation economy,” the bank primarily counted startups, high-net worth executives, venture capital firms, and private equity funds as its clients. At the end of last year, Silicon Valley Bank had $211.8 billion in total consolidated assets, including $173.1 billion in customer deposits.

The beginning of the end for Silicon Valley Bank may be traced back to its disclosure on Wednesday, Mar. 8, that it had sold $21 billion of U.S. Treasuries and mortgage-backed securities at a loss of $1.8 billion after taxes. The bank said that the sale was in response to expected interest rate hikes, “pressured public and private markets, and elevated cash burn levels from clients as they invest in their businesses.” This was coupled with revised financial guidance that implied lower deposit balances, lower loan originations, narrower net interest margin, and lower net interest income. Additionally, the company announced an offering of both Common and Mandatory Convertible Preferred Stock.

In plain English, SVB had invested the cash it was holding in bonds, as many banks do. But because SVB felt it needed to have more cash on hand, reportedly to prevent a credit downgrade as well as to cover client withdrawals, it decided to sell the securities it could, even at a loss. (With the Federal Reserve raising interest rates, bonds have been dropping in value.)

The disclosure triggered an outflow of cash by depositors that, by Thursday, became a $42 billion “run on the bank,” leading to the Fed’s actions on Friday and Sunday. Although the FDIC normally insures up to $250,000 per depositor at a given institution, Yellen’s announcement means depositor’s will have access to all their money, even deposits that exceed the FDIC cap.

What Happened to Signature Bank?

Signature Bank, a New York-based lender that catered to the crypto industry, was also shuttered over the weekend in an effort to rein in spreading risk in the banking industry.

The tech-focused institution had a market value of $4.4 billion as of Friday, compared to its $110.4 billion in total assets as of Dec. 31, 2022. After a 40% selloff this year, the bank reported last week that it was struggling, leading to a quick drawdown of the bank’s deposits.

As with SVB, depositors will be made whole, according to the Treasury and state bank regulators.

Consequences for Other Regional Banks

On Friday, trading of at least five banks was halted due to volatility, as investors quickly sold the stocks of similar banks such as First Republic Bank, Signature Bank, and Western Alliance. To calm markets, Treasury Secretary Janet Yellen released a statement, noting that the banking system “remains resilient”.

Part of the selloff early on Friday, big banks actually ended the day generally up or only slightly down, as investors’ fears of contagion subsided. KBW Bank index, which tracks 24 of the world’s biggest lenders, slid to $89.77 in the morning, but rallied and closed at $92.22.

The Takeaway

In the wake of these sudden closures, the banking sector saw its stocks slide while some institutional and startup clients may have experienced a cash crunch on Friday, when paychecks were due to go out.

All depositors at both institutions will be made whole, and have full access to their money starting Monday, March 13. These government actions will not protect everyone though, including shareholders and certain unsecured debt holders.

Money taken out of the Deposit Insurance Fund and given back to the depositors of the banks will be recovered by a special assessment on banks — as required by law — as opposed to taxpayers.


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This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.


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Should you be saving or investing right now? Here’s how to tell

Should you be saving or investing right now? Here’s how to tell

Many people use the terms saving and investing interchangeably because they go hand in hand to ensure financial stability. But saving and investing have many differences that you should know when planning for your financial future. In general, saving provides a safety net for unexpected expenses and short-term spending goals, while investing is a strategy to help build long-term wealth. Being aware of these differences can help you prepare the best financial foundation for yourself and your family.

Related: Money management and setting your financial goals

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The main difference between saving and investing is the amount of risk you are willing to take to reach financial goals.

When saving, you generally want a low-risk option to build and maintain wealth. Saving is when you gradually set aside funds — maybe a portion of your paycheck — in a safe place, like a savings account or money market account. These accounts allow you to store cash that can be easily accessible and have little risk of loss of value. Saving is often intended to reach shorter-term financial goals, like creating a fund for emergencies or saving a house down payment.

Investing is when you put money at risk to make more money. When investing, you may trade stocks, mutual funds, or other assets because there’s a potential for a return on the investment, but you are also at risk of losing the value of the investment. The goal of investing is to grow your wealth over time by taking advantage of capital appreciation and compound interest. This strategy is typically used to reach long-term goals, like building wealth for retirement or saving for a child’s college fund.

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Saving and investing is not an either/or proposition. Generally, saving and investing go hand in hand to ensure financial stability. However, certain scenarios make one strategy better than the other.

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Building up emergency savings is one of the first things to do before you start investing. An emergency fund would ideally help you following an unexpected financial event, like paying a hefty medical bill or covering expenses if you were to lose your job. It is recommended that you save the equivalent of three to six months of expenses and debt payments in an emergency savings fund.

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If you need money for short-term goals, like a down payment on a house or an upcoming vacation, you should choose to save. A high yield savings account or a money market account may be the best option to save for these short-term goals.

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Savings accounts are highly liquid, meaning that you can access the money in your account as soon as possible. You can go to your bank, withdraw funds from a savings account, and have the cash right away.

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Here are some tips for deciding when you should decide to invest.

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Paying off high-interest debt, such as a credit card balance, will likely provide you with a sound financial foundation. You’re paying off an interest rate that’s likely higher than potential investment returns. Once you pay off high-interest debt, you can look to invest money in stocks, bonds, and other assets.

Recommended: Paying Off Debt—9 Strategies to Try

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There is potential for greater rewards when you invest because of a capital appreciation and compound interest. But when you invest, there is no guaranteed return on your investment, and you can lose part or all of the funds. This risk-reward calculation is best for long-term goals, because you can withstand the volatility of the financial markets. This strategy is best for building a retirement nest egg or savings for a child’s college tuition.

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Contributing to an employer-sponsored 401(k) or an Individual Retirement Account (IRA) should be your first step in building wealth for retirement. These retirement accounts provide tax-advantaged ways to invest your money. Once you’ve maxed out contributions to these accounts, it may be good to explore additional investment products.

Recommended: IRA vs 401(k)—What is the Difference?

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  • FDIC Insurance: You want to make sure the Federal Deposit Insurance Corporation (FDIC) insures your savings accounts. The FDIC guarantees up to $250,000 in nearly all savings account products if your bank fails.
  • Interest Rate/APY: Many traditional banks pay little interest on savings account deposits, so you may want to shop around to see where you can get the best rate. Certain institutions offer higher interest rates than large, brick-and-mortar banks.
  • Fees: You want to look for savings accounts with little or no fees. Many banks may waive fees if you have a large enough balance or enroll in direct deposit, while other institutions won’t charge a fee no matter what.

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  • Diverse investment options: You want to ensure your brokerage firm offers a wide range of investment products, including stocks, bonds, options, ETFs, and mutual funds. Additionally, brokerage firms that provide individual retirement accounts (IRA) may be ideal if you’re looking to save for retirement.
  • Commissions/Fees: High commissions and fees can eat away at your investments, so you want to look for brokerage firms with low investment fees.
  • Account Minimums: Many brokers require that a customer deposit a minimum amount to open an account. Depending on your financial situation, you may want to look for a brokerage account with an account minimum that you can afford without straining your finances.

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Another thing to consider when deciding between saving and investing is how inflation affects your money with each strategy. With investing, there is a potential for your investments to keep up with inflation, which may be ideal in a high inflation environment. In contrast, inflation may eat away at your savings because the money you put into your account today will be worth less a year from now.

Nonetheless, no one strategy works for everyone because financial situations differ, as do financial goals and comfort with risk levels. The real question isn’t whether you should save or invest; it’s more about how to include a combination of both to meet your financial goals.

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This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.


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