After the recent collapse of Silicon Valley Bank, a lot of people are asking the question: how safe are banks? SVB has faced difficulties in recent months, and this has resulted in the US government taking over the establishment last week.
However, according to financial industry experts, SVB was the exception and, in general, banks are safe. Most of SVB’s customers were technology startups with loans. But, with rising interest rates, many of these customers were forced to withdraw funds due to higher expenses.
In addition to this, the company had invested a lot of its deposits in government bonds when the yield was under 1%. The value of the bonds has now reduced, as yields have reached 5%. After selling some of its bonds to generate cash, it lost approximately $1.8 billion.
Is money in a bank insured?
Most countries have schemes that provide some kind of insurance if a bank collapses. In the US, the Federal Deposit Insurance Corporation (FDIC) insures funds up to $250,000 if a bank fails, The amount was raised from $100,000 in 2008 at the start of the financial crisis.
In the UK, the majority of banks and building societies are protected by the FSCS, which gives customers deposit protection of up to $85,000 if the bank fails, as well as coverage of amounts of up to $1 million if the balance is temporarily higher, like in the middle of a property sale.
The European Union has a similar scheme, the Deposit Guarantee Scheme (DGS), which covers all EU banking deposits of up to €100 000.
Although rising interest rates are putting pressure on the banking industry, many experts believe that the risk is still minimal, as the industry is more robust than it was in 2008.
In an interview with Fortune magazine, William Chittenden, associate professor of finance at Texas State University, said, “Having said that, SVB’s collapse does highlight the risk that many banks have in their investment portfolios. If interest rates continue to rise, and the Federal Reserve has indicated that they will, the value of the investment portfolios of banks across the U.S. will continue to go down.”