Impact – Wealth Management


SVB Failure – What does it mean for ME

Bank Failures

The headlines are abuzz.  Silicon Valley Bank failed.  Signature Bank failed.  The tone of the media makes us think that we should be worried.  The stock market is down and consequently our investment portfolios are down so we feel a little worried.  But if you’re like a lot of people, you don’t really understand what’s happening.

Why is this impacting the stock market?

How does this impact me?

Should I be worried?

Should I take my money out of the bank?

What should I do?

Let’s unpack it.


To understand what’s happening today and why it matters we have to first understand a little bit of the basics of how a bank makes its money.

When we deposit money in our bank, in our minds that money goes into our own personal little electronic vault and every so often the bank opens up our little vault and puts a little (tiny tiny) bit of interest in there.

But even though it seems like it, that little bit of interest doesn’t just magically appear.  The bank has to make money somehow.

In reality, when we deposit money in the bank the bank uses it and invests it.  They pay you a little bit of interest as a “thanks for letting us use your money.”

Banks invest your money in a number of different ways.  One of the most obvious ways is that they take it and then loan it out to other people… home mortgages, small business loans, etc.  They collect interest on the loan that is greater than the interest they’re paying you in your savings accounts so that is usually a profitable transaction.  Banks can also invest in other things like government bonds.

The bank can’t invest ALL their money though.  The bank is required to keep some cash reserves on hand to cover the day to day transactions.

If the withdrawals at the bank exceed the amount of cash reserve they have then the bank is forced to sell some of its investments.

With me so far?


The second really important thing to understand when you’re unpacking the chaos of the day, is the impact of interest rates on the bonds.

The world of interest rates can feel a little like Alice in Wonderland.  Up is good and also bad.  When interest rates go up, bond prices go down.

Stay with me, I think I can help this make sense.

What exactly is a bond?

When you buy a bond, you are essentially giving a loan.  If you buy a local municipal bond you are giving the local municipality a loan.  If you buy a government bond you are giving the federal government a loan.  You get the idea.

Bonds pay a set interest rate for a set period of time to the holder of the bond.

If you hold on for the whole duration of the bond (sometimes as long as 30 years) then you receive the fixed interest rate that you agreed upon and you get your money back at the end.

BUT here’s where it gets messy.  Almost no one keeps a bond for its whole duration.

Selling Bonds

What do you do if you want to get rid of a bond before it matures (before the hypothetical 30 years is up)?

You cannot take it back to the person/entity that you bought the bond from (gave the loan to) and say “We changed our minds, we want our money back.”  Instead you have to pack up your bond and head off to “the bond market”… where bonds are bought and sold like a giant swap meet.  (Of course you don’t actually have to physically pack it up and go off to market, it’s all done electronically, but you get the idea.)  

Now imagine you’re at the market with your 3% bond that won’t mature for a long time (lets say 17 years) and next to you is a guy who is selling a 5% bond that matures in 18 years.

Now you’re in trouble. You are probably not going to get a very good offer for your bond.  Even though your bond matures sooner, it’s still a long way in the future.  In order to justify taking a lower rate for that long, the buyer will offer you an amount that is less than the “face value” of your bond.

And this is why bond prices go down when interest rates go up.

And this is the challenge that people AND banks face when they are forced to sell their bonds in a rising interest rate environment.

Yes, on NEW loans and bonds the banks are getting paid much better interest rates.  But banks have lots of other interest rate sensitive assets on their balance sheets that do NOT do well if they have to be sold off in a rising rate environment.


Even though there are lots of banking regulations in place, bank failures can still be a little bit hard to predict because they can happen really fast.  At the first whiff of a problem there is often what’s called “a run on the bank” or a “bank run” – where investors go and quickly try to withdraw all of their money.

At Silicon Valley Bank there were withdrawals totaling around $42M in 48 hours.  Of course this is far above their typical day-to-day transactions which forced them to have to sell most of their “Available for Sale Securities Portfolio” at a loss.

At most banks, depositors are protected up to $250k of deposit insurance (the most common insurer is the FDIC but there are other insurers as well).


If you lived through the Great Recession of 2008 you probably feel some type of way about bail outs.  In 2008 “bail outs” were highly controversial loans made to companies that were “too big to fail”.  Many people argued that these bailouts protected “the big guys” – the ones who arguably made bad decisions.  There are a lot of other factors to consider when you’re analyzing this situation, but we won’t get into that.

The word “bail out” has made a comeback as talk swirls around the Silicon Valley Bank failure (which is, as you’ve heard, the 2nd largest bank failure since the 2008 crisis).

The government did not bailout Silicon Valley Bank (or Signature Bank).  They let them fail.

This time instead of bailing out the institution, the government is bailing out the depositors.  The people who trusted the bank with an amount over the FDIC limit.

This is certainly a bailout of sorts, but it’s a little different than the “bail out” that we think of when we compare it to 2008.


Even though the FDIC is saying that depositors are being “made whole”, there is certainly still fallout from the collapse.

Companies that banked at SVB and Signature (companies like Roku and Etsy) had their accounts frozen for a period of time.  Employees went without paychecks.

All of these things have a ripple effect on the economy.

Since the stock market is driven by companies’ ability to make a profit, it is keenly focused on anything that could affect that.  There are certainly a LOT of factors in the events of the last few days that need some consideration.

If interest rates keep rising, more banks could be in trouble.

Rising interest rates are one of the primary ways that we keep inflation under control so if the Fed slows down on the rate hikes inflation could get worse.


First and foremost, make sure your deposits are insured.  Don’t have more than $250k in a single account type at a single bank.  Learn more about how FDIC insurance works here.

If you are a young investor investing aggressively for the long term, buying in times of uncertainty can be a great opportunity for you.

If you are nearing or in retirement like most of our clients, things like this can be a little hard on your blood pressure.

Finding the Right Help

The absolute most important thing you can do during times like these is make sure that you are working with the right financial advisor.

If you are nearing or in retirement you need to make sure that your financial advisor is really working for you.  Are you meeting with them regularly?  Do they explain things in a way that you understand?  Are you confident in your long term strategy?

Last, but certainly not least, make sure you know how your financial advisor is getting paid.  The way that you are paying your financial advisor can have a SIGNIFICANT impact on how your portfolio performs over the long-term.  Don’t pay your advisor too much.  Make sure you are working with a fiduciary.

Check out our blog on how financial advisors get paid.

More Resources

If you want to read more about how banks make money, how they fail, and the current situation with SVB, we’ve included some additional resources below.  These links aided us in the writing of this article.

Remember that investing involves risk.  As a general rule you should only trade in financial products that you are familiar with and understand the risks associated with them.

What Banks Do With Your Money

History of Savings Account Interest Rates

Bank Failures


Impact Wealth Management LLC is a fee-only Registered Investment Advisor (RIA). We are based in beautiful Sioux Falls, SD and regulated by the State of South Dakota. Throughout this site, we went out of our way to present unbiased data believed to be from reliable and respected sources. However, its accuracy, completeness, and relevance are not guaranteed and no responsibility is assumed for errors or omissions.