The sudden bank run on Silicon Valley Bank (SVB) that materialized over the course of yesterday is quite troubling. The reality is that banks make bets on interest rates, and when interest rates move suddenly in one direction, as they have over the last year, it creates challenges for a bank’s Risk Department. In the case of SVB, they are reported to have very low yielding long term assets, such as 10-year or 30-year Treasuries, that they may have purchased when interest rates were sub-1%. These assets would presumably trade at such a significant discount if they were to sell them today that the bank would not be able to cover its liabilities.

SVB’s situation is both unique and extreme since most of the bank’s depositors are huge venture capital funds and entrepreneurs from Silicon Valley. These are depositors who are so wealthy that the FDIC insurance amounts of $250,000 for an individual ($500,000 for a couple) are entirely inconsequential. Because the depositors are so over-exposed to a failure, a sudden bank run, especially in Silicon Valley where information can also move and be acted on much more quickly than normal.

It is fair to say that ordinarily when banks have unrealized losses, they have the time and ability to borrow from the Fed’s discount facility.

While we therefore would not expect that other banks will have runs like this, there is just one simple thing that depositors can do with their cash to protect themselves, and it is the same advice that I have given since BestCashCow’s founding in 2005.

The advice is to stay within FDIC and NCUA limits at real banks and credit unions. Your money should not only be FDIC-insured or NCUA-insured, but it should be someplace where you have direct access to it, where your name is on the account, and where it is completely transparent what you are in. Taking this advice one step further, I would reiterate my advice to avoid fintechs, even those claiming that they are holding your cash in a government-insured account, and money market accounts. The institutions behind these instruments could easily expose them to either (a) other institutions like SVB, and or (b) be engaged in activities that may involve risk and may not be completely transparent in order to offer deposit rates that are competitive with those that banks are offering.

In short, the safest thing for your money today is quite simply deposit accounts at FDIC or NCUA-insured banks.

Compare online savings rates here.

Check out 1-year cd rates here.

The Consumer Financial Protection Bureau (CFPB) is a regulatory agency of the United States government that is responsible for consumer protection in the financial sector. The CFPB was established under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 in response to the 2008 financial crisis, which highlighted the need for stronger consumer financial protections. The CFPB's mission is to make markets for consumer financial products and services work for Americans, whether they are applying for a mortgage, choosing among credit cards, or opening a savings account or a CD. The agency enforces federal consumer financial laws and regulations, educates consumers about financial products and services, and monitors the financial marketplace for abusive and fraudulent practices.

The Federal Reserve has raised the Fed Funds target rate by 25 basis points to a target of 4.50% to 4.75%. Like the Fed’s six moves in 2022, today’s Fed move was very well telegraphed by Chairman Jay Powell. However, unlike each of the Fed’s five previously moves that were either 50 or 75 basis points, today’s move represents a raise in he target rate o only 25 basis points.

The Fed also states that it continues to see the need for “ongoing increases” in the Fed Funds rate, indicating that it may still not be near the end of its hiking cycle.

The prospect of slower moves had lead market participants to believe that the Fed’s hawkish tone is ending, with perhaps one further 25 basis point increase after this February 2023 move, and that the Fed would be already acting to lower rates by this time in 2024. That looks less likely now that the Fed is projecting ongoing increases.

The challenge here is quite evident. While some observers can manipulate inflation measurements to show that it has brought inflation under control, you would need to be living in a shell not to realize that sellers of most goods or services with pricing power can continue to gouge their customers.

Hence, the logic applied by many economists is that by its very nature, heightened inflation caused by long periods of tremendous liquidity can only be brought under control only by raising rates to the point where they reigning in the economy and perhaps even cause a recession.

If this logic holds true, several more Fed increases will be coming still. And, it is possible that the fact that the markets have yet to respond adversely to the Fed’s hawkishness will give the Fed further leeway to move further and longer than market participants are projecting.

Consumers should continue to protect themselves through seeking the best savings and money market rates and also keep a close eye on sort-term CD rates.