Banks Behaving Badly, and How Your Accounts Are Insured

Just four months ago, cryptocurrency exchanges and platforms went into a tailspin as FTX imploded. Now, banks transacting in real (as opposed to virtual) currencies are incurring problems.

The very big difference is that bank, credit union and brokerage accounts are regulated and have insurance backstops. If your bank fails, you will be reimbursed, provided you meet the U.S. Federal Deposit Insurance Corp. (FDIC) insurance requirements and your account is FDIC insured. The same applies for credit union [National Credit Union Administration (NCUA)] and brokerage accounts [Securities Investor Protection Corp. (SIPC)].

I’ll get into the trio of account insurance coverages in a moment, but first I want to address SVB Financial Group (SIVB), which owned Silicon Valley Bank, and Credit Suisse Group A.G. (CS).

Much Monday morning quarterbacking has been done over the past seven days regarding Silicon Valley Bank. I’m not going to rehash it. Rather, I’m going to address whether the average individual investor (and new self-proclaimed banking experts) could have determined if Silicon Valley Bank was veering dangerously toward the edge of a cliff.

The most obvious risk facing the company was the clients it served. “Many of our loans, particularly in our portfolios for early-stage and mid-stage privately held companies, are made to companies with modest or negative cash flows and/or no established record of profitable operations,” said SVB Financial Group in its Form 10-K. [Form 10-K is an annual filing made with the U.S. Securities and Exchange Commission (SEC).]

SVB Financial Group disclosed signs of strain among its clients in its fourth-quarter earnings release and during its conference call. The provision for credit losses increased by 14% from the third quarter. SVB Financial Group described the cash burn rate (how quickly a company is spending cash in excess of what it is bringing in) among its clients in the venture capital space as still being “~2x higher than pre-2021 levels.” SVB Financial Group further stated that the cash burn rate “still has room to adjust to the slower fundraising environment.” Former CEO Greg Becker said he anticipated “a little bit more pressure in the first couple of quarters” of 2023.

So, there were obvious risks on the client side.

The balance sheet issues would have been much harder to detect without a deeper understanding of what the firm was doing with its portfolio and the subsequent implications. SVB Financial Group’s capital ratios (a measure of a bank’s fiscal strength) showed some deterioration during the fourth quarter, but not significantly so.

One sign of caution was the average duration (a measure of interest rate sensitivity) of the company’s held-to-maturities portfolio. One would have needed to spend time looking at the table, correctly assess the bank’s exposure to rising interest rates and understand the risks in the context of being able to fund customer withdrawals. It was clear in hindsight, but not so easy to connect the dots prior to last week.

As Warren Buffett wrote in his 2007 letter to Berkshire Hathaway Inc. (BRK.A) shareholders, “You only learn who has been swimming naked when the tide goes out.”

Credit Suisse—which was blamed for causing yesterday’s drop in the stock market—is different. There have been negative headlines about the company for years. For example, The Wall Street Journal reported yesterday that Credit Suisse has taken around $4 billion in litigation provisions since 2020. The scandals involving the bank date back further.

Most recently, the company’s management team concluded that Credit Suisse’s “internal control over financial reporting was not effective as it did not design and maintain an effective risk assessment process to identify and analyze the risk of material misstatements in its financial statements” in the latest annual report.

In other words, this has been and continues to be a company with self-inflicted wounds and headline risk.

Could there be problems with other banks? Potentially. Anytime there is stress in the economy—either broad or in certain pockets—strains on the financial system emerge. Strains and a financial crisis are two very different things, however. The cumulative number of bank failures per year in the U.S. since 2000 has only exceeded 25 four times. Those four years were 2008, 2009, 2010 and 2011. Most years, there have either been no bank failures or fewer than 10. Even during the economically tough year of 2002, just 11 banks failed according to the FDIC.

Protections for Your Checking, Savings and Brokerage Accounts

There are three entities providing insurance for banking, credit union and brokerage accounts. Not all accounts have these protections, so it is important to check. It is also very important to understand the limits. Don’t assume amounts above the limits will be backed by the FDIC just because they were for Silicon Valley Bank and New York’s Signature Bank.

FDIC deposit insurance covers checking, savings and money market deposit accounts as well as certificates of deposit (CDs) and other similar bank products. The standard insurance amount is “$250,000 per depositor, per insured bank, for each account ownership category.” Keep in mind that not all bank-like products are FDIC-insured—especially those offering surprisingly high yields—so be sure to check. FDIC insurance protects you against an insured bank failing.

The National Credit Union Share Insurance Fund (NCUSIF), managed by the NCUA, covers single accounts such as “regular shares, share drafts (similar to checking), money market accounts, and share certificates.” These credit union accounts are insured up to “$250,000 per share owner, per insured credit union, for each account ownership category.” NCUSIF protects you against an insured credit union failing.

SIPC insurance covers brokerage accounts and protects against the loss of cash and securities (excluding currencies, commodity futures contracts or warrants) at a financially troubled or failed broker. It provides protection of “$500,000, which includes a $250,000 limit for cash.” This protection seeks to restore securities and cash missing from a failed broker—not any decline in the value of those securities.