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As we have seen since 2008, the banking industry has undergone a significant transformation. The COVID pandemic years and the recent interest rate changes in response to inflationary pressures have brought unique challenges to the banking industry. Unfortunately, not all banks have navigated these challenges successfully, as we saw in the case of Silicon Valley Bank (SVB) and Signature Bank. SVB’s failure was due to several missteps, which we have outlined below:

1. The bank invested excess deposits into fixed-rate securities that became underwater as interest rates increased rapidly.
2. SVB classified these securities as “Held to Maturity” on its balance sheet, which meant that any unrealized losses were opaque to market participants.
3. The bank’s business model concentrated predominantly on one client vertical – venture capital, private equity, and start-ups. Furthermore, these clients placed their funds in a high concentration of uninsured deposits in accounts structures that can exit the bank quickly when there is a lack of confidence.
4. As its venture capital clients burned through pandemic-era liquidity in their operations and other clients sought safer deposits with higher rates, the amount of SVB’s deposits declined steadily. The bank did not have sufficient on and off-balance-sheet liquidity to meet sudden deposit withdrawal requirements, resulting in a $1.8 billion loss.
5. The losses from the sale of fixed-rate securities significantly impaired SVB’s capital, requiring the company to raise $2.25 billion to meet regulatory minimums. The bank attempted but failed to raise the necessary capital.
6. As SVB’s stock price plummeted, many of its clients began to move money out of the bank, causing a classic “Run on the Bank.”

On Friday, March 10th, 2023, California’s financial regulator, the DFPI, took possession of SVB, citing inadequate liquidity and insolvency. As the receiver, the FDIC will retain all assets from SVB for later disposition. Depositors at FDIC-insured banks are subject to up to $250,000 deposit insurance in the event of a bank failure.

What should our clients do?

First, it is essential to bank with more than one bank, so you can move your money quickly when needed. Second, make sure you know the health of your bank. Bank monitoring websites like www.bankrate.com and most astute CFPs and CPAs can provide information on the health of financial institutions. Third, understand how you receive funds from intermediary banks for outsourced bank transactions like merchant service and ACH Credits because they too may be impacted.

If you remain concerned about systemic risk in the banking system, there are several ways to insulate your money. ICS checking and ICS Money Market, as well as CDARs products from banks, are excellent ways to protect your money and earn interest while doing so. Institutions, like MainStreet Bank, that offer ICS and CDARS are members of the IntraFi network. When we place your funds through the ICS or CDARS service, that deposit is divided into amounts under the standard FDIC insurance maximum of $250,000. The funds are then placed in demand deposit accounts or money market deposit accounts (using ICS), or in CDs (using CDARS), at multiple banks. As a result, you can access coverage from many institutions while working directly with just us! You receive one monthly statement from MainStreet Bank for each service in which you participate, and, as always, your confidential information is protected. Please feel free to reach out directly to us, and we can assist you with this process.

For more information, please feel free to contact us at info@millermusmar.com or call us at 703-437-8877.

Please note that based on current IRS rules and standards, the advice contained herein is not intended or written by the practitioner to be used and cannot be used by the taxpayer to avoid penalties.

MillerMusmar CPAs is an established accounting firm with offices in Reston, Virginia. We have a twenty-five-year history of providing top-quality auditing, tax, and accounting services to clients throughout the Washington Metropolitan area and internationally. By combining the expertise of a mid-sized firm with personal attention, we are both large and small enough to deliver the responsive service to our clients. For more information, please visit our website at www.MillerMusmar.com .