It's not every week that a bank fails, and it's never a good sign. But to what degree does the collapse of Silicon Valley Bank (SVB) affect your own finances?
There are a few potential risks, I think. But the degree of risk for you depends on your particular situation.
The biggest risk is if you personally kept over $250,000 at SVB. It's uncertain whether the federal government will step in to make you whole. Many businesses that held money with SVB pulled their capital out last week, which is pretty understandable.
Another risk is if you work for a company that kept all its money at SVB, but didn't pull its funds out. Your employer could face a financial crisis, barring intervention from venture capital investors or the government. That would be bad news for your employment prospects, and even your ability to collect your next paycheck.
If you're part of the startup ecosystem in a broader sense, none of this is good news. Whether you're an investor, software engineer, fund manager, or entrepreneur, you will probably be affected by some contraction in this sector over the coming months. But you never know how these things will play out. Companies like Microsoft, Google, and Apple have massive amounts of cash on their balance sheets, which they might be willing to use to offer bridge loans while the FDIC decides to what degree to make depositors whole. Or things could get worse. But you really never know.
Okay, but what if you're like most people? You're not a customer of SVB (at least not above the $250,000 FDIC-insurance limit), you're not a startup employee or venture capitalist. What's the risk, here? Will this problem spread throughout the system and cause another financial crisis like 2008/2009?
I don't think this is a particularly likely outcome. First, we already know exactly what happened. The cause of the collapse is well understood. It appears to have resulted from an idiosyncratic business model not shared by many other banks, combined with poor risk management on the bank's investment portfolio.
Will other banks fail for similar reasons? Will the failure of SVB spark a larger banking panic? Anything is possible, but I think another financial crisis is unlikely. What's different today from 2008 is that we already have a playbook for addressing crises like this. Whereas there was a lot of uncertainty as to whether and how the government might step in to address the 2008 crisis, today that intervention is almost a given. The playbook already exists, it's been tested and revised, and now all they have to do is run it.
Too, having a bank fail pressures the Fed to slow down their rate hikes. If you're worried about a recession or market decline, this is good news for you. After all, these have been the main risks leading markets downwards.
That's not to say it's all smooth sailing from here. Nobody knows what the future looks like when it comes to inflation, financial stress, monetary policy, and economic growth. In fact, these things have rarely been less certain. But I would caution against taking advice from anyone who claims to know for sure what it going to happen from here, or from anyone who advises going all to cash, or all to any particular asset class. The reality is that no one knows what is going to happen, or what assets will perform best.
And for that reason, I have never been happier to own a diversified portfolio. The risk-adjusted returns for a diversified portfolio are far stronger than for individual assets by themselves. A thoughtfully diversified portfolio, regularly rebalanced, remains the best place for your money.