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Don’t Bank on Your Bank

Bank On Your Bank

Unless you’re over 120 years old, you probably haven’t lived long enough to know what it’s like to experience a bank run. Well, that’s exactly what happened last week when Silicon Valley Bank’s (SVB) customers decided to move all their money. You’re probably asking yourself: “Can this happen to me?” You betcha! But there are steps you can take to protect yourself, the same steps I use. To understand these, let’s go over what happened.

Who in Hell is Silicon Valley Bank?

Unless you follow Venture Capital (VC), you’ve probably never heard of Silicon Valley Bank (which I like to refer to as Stupid Valley Bank). SVB is not an “everybody” bank, it was a special bank which focused on startups and tech companies (many from Silicon Valley).

The short version: they got a lot of customer deposits and decided to buy $26 billion in long-term government U.S. Treasury-bonds at a time when interest rates were going up. Because the brainiacs at SVB didn’t have a chief risk officer (she quit almost one year ago and took $7.1 million to ease her pain on the way out), they didn’t buy interest rate swaps (which are a form of insurance). The Federal Reserve Bank then raised interest rates seven times last year, significantly reducing the bonds’ values. Just before their fall from grace SVB decided to tell the world that they were issuing new stock because they needed mucho dinero. Financial analysists took a look, and it didn’t take long for the panic run on the bank to begin. The result? SVB is kaput!

What Happened Next?

Just like in a T.V. series SVB jumped the shark, and the shark ate them. The government bailed out the customers (which in my view will cause more inflation.) So now you need to worry about both your bank running out of money and what do with continuing inflation.

What Should You Do?

I can’t recommend a particular bank, since I’m not Nostradamus (but I do think my writing is a lot clearer), and all banks a have risk of going broke. But I am going to tell you what I do, and then you can make a more informed decision.

Allocate Your Capital

Allocate Your Capital Across Multiple Bank Accounts

As Blake likes to say, “Always Be Allocating” (or something like that.) Allocate your bank balances among different banks. I bank at multiple banks, some big, some small. Why? For two reasons:

FDIC insurance – If you’ve got less than or up to $250K in one bank account, called FDIC insurance, the government will bail you out. This was started at $100K by FDR during the Great Depression at and George W. Bush increased it to $250K. If you’ve got more than $250K in any bank, for your protection you should move it.

Banking relationships – when I’ve got money in different banks for a long time, they will often offer me better deals on home loans, HELOCs, credit cards, and lines of credit.

Guess what? Everyone is now reallocating their bank accounts. I had a client call Chase Bank this week to move some money. So many people are moving money into Chase that the banker had to schedule an appointment a week out.

Diversify Your assets

Diversify your assets away from just cash.

Because of inflation and the banking crisis, people are worrying about leaving all the money in cash. There are many places to which you can move your money to protect it from ongoing inflation and bank runs.

They include:

  • Gold & other precious metals
  • Short-term government bonds (like T-Bills and iSeries Bonds)
  • Real estate

Real estate anecdote: we all know that real estate hasn’t been doing very well this year. The bank run spooked so many people that a realtor just told me that people are going berserk making all cash offers on real estate, instead of leaving their money in the bank.

Vet Your Bank

Vet your bank

Learn to read a balance sheet and see what analysists are saying about whom you bank with. Maybe you don’t have time to go into the details of your bank’s balance sheet, but you know who does? – the Internet. Websites like Seeking Alpha, Motley Fool, and MarketWatch are constantly putting out information about the financial stability of different stocks. You better believe that in the coming months, you will see a lot of articles on the safest banks.

Here’s one by CreditDonkey on the top 10 safest banks:

Do some research, because you never know when the day will come that Uncle Sam will stop the bailouts.

That’s it, I’m going to go move some money myself.