Sara Stanich, CFP®, CDFA Cultivating Wealth

Sleepless in Silicon Valley

By now you’ve heard at least something about the sudden failure of SVB or Silicon Valley Bank. We are following this very closely, so let me break it down for you:

Who Is SVB?

SVB bank has been very good at getting business from technology firms in, you guessed it, Silicon Valley. They have benefited from the long boom in the technology industry for a long time, financing deals and holding the money for their clients. They’ve had lots of cash for a long time, which is very good for a bank!

Banks traditionally make money by making a “spread” on the difference between the interest they pay to depositors and the interest they earn on loans like mortgages. There are rules (it’s a highly regulated industry) about how much banks can lend so that there should always be enough cash available to customers who need to make a withdrawal, be it at the ATM, for the closing on a new house, or to meet the company payroll. But it’s totally normal that banks don’t have every dollar on hand if every customer decides to withdraw their money on the same day. 

SVB had much more deposit activity than loans, so they bought seemingly safe bonds, specifically Mortgage Backed Securities (MBS) with longer maturities. This should have allowed them to make that spread on the interest they received over the interest they paid to creditors.

What Went Wrong

In recent months, interest rates have increased rapidly, technology stock values dropped, and venture capital dried up. This created a cash flow crisis for SVB and it escalated quickly:

• Their MBS portfolio lost value (meaning current saleable value) because due to higher interest rates, investors could now buy bonds with higher dividends and shorter durations. 

• Tech firms (SVB’s core customers) haven’t been getting much new investment and have instead been spending down their cash in the bank.

• To provide cash to their customers, SVB had to start selling their bond portfolio at a loss. 

• Realizing this wasn’t sustainable, they announced they were looking to raise capital last week.

• Coming from a bank holding your many millions of dollars this sounds Very Bad, so customers started withdrawing funds via wire transfer as fast as they could. Panic spread via text, Twitter and Slack!

• Their stock price dropped so fast that trading was shut down mid morning on Friday.

So these are not the same mistakes made as those of the banks in 2008ish with the Global Financial Crisis. They did not make risky loans and we have not heard any talk of fraud. While they did not properly manage unanticipated risk, these are all different issues, which are more specific to this one specific bank. That is good news.

What Happens Now

The FDIC (Federal Deposit Insurance Corporation) announced that the bank has been shut down and depositors would have access to funds Monday. The FDIC is set up to handle this situation (banks actually close every year), and have already created a new bank, Deposit Insurance National Bank of Santa Clara (DINB) to allow depositors access to their insured deposits and time to open accounts at other insured institutions. However, it sounds like what they really want is for a big bank (Chase, Wells Fargo, Citibank, etc) to take over and I sense that negotiations are happening as I write this.

Frankly, it all appears very speedy and orderly so far. When it has to happen, FDIC follows a set process of shutting down a bank on a Friday (usually after close of business, so the fact that it was earlier in the day was unusual) and reopen on a Monday. If only every government agency were this efficient!

One “problem” in this case was that SVB account holders are … very rich? The FDIC limits their insurance coverage on bank deposits to $250,000 per account title. Apparently over 93% of SVB accounts (many of which are business accounts) are over the FDIC insurance limit. 

Sleepless Nights 

This gets me to sleepless nights. The timing is … not great. Tuesday March 15th is a payday for many, many people. It’s also the business tax filing deadline, and the day that many millions of estimated tax payments are set to automatically be paid from bank accounts. What happens to all those payments? 

Startup founders and finance teams are not sleeping well this weekend, because they really are not certain if they’ll be able to access their money (or make the payroll) on Monday. Anyone with an account at SVB is going to have a pit in their stomach until this is over.

Many SVB customers are essentially small business owners and my heart goes out to them. We are very fortunate that our company has no accounts and no known exposure here.

That being said, we expect an orderly transition here. No one wants Americans to lose faith in the banking system, and up until very recently, SVB had a good business which will be attractive as an acquisition. An acquisition would mean that FDIC insurance would not be utilized, and therefore the $250,000 limit would not come into play. The effect on the banking system and the stock market remains to be seen.

On Monday night, everyone will hopefully sleep very well. 

This article is for educational purposes only and should not be considered investment advice. Speak to a financial advisor for advice on your personal situation.

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Understanding the Secure Act 2.0

Secure Act 2.0 is Congress’s latest attempt to nudge us in the direction of saving more now to have more later. While there are many, many things packed into the 19 pages of legislation (like a dense fruitcake), the gist is clear. The government is looking for ways to incentivize retirement saving, remove roadblocks to stashing more as we approach retiring, and remove excuses to wait.

Automatic Enrollment

To boost employees’ savings, Secure Act 2.0 requires automatic enrollment in 401(k) and 403(b) plans starting in 2024. Employees may opt out, but that would require initiative. Congress is banking on employees accepting the status quo. Once signed up, the minimum 3% contribution level savings rates increase automatically until they hit minimum 10% (max 15%). 

Student Loans

One of the first roadblocks many people face to retirement savings is student loans. For those burdened with student debt, they can be held back due to the sheer size of monthly payments. This act lets employers see student loan payments as if they were retirement contributions and include them in any matching plan. The employer contribution goes directly into qualified retirement plans on behalf of the employee, starting in 2024.

529 Accounts

On the flipside, many families try to save for college in a 529 account and worry that their child may not need all the college savings. Funds could be trapped unless they take a penalized non-qualified withdrawal which can cause some to hesitate, delay or not participate. The Secure Act 2.0 provides an outlet for up to $35,000 to be rolled over into a Roth IRA for the beneficiary over their lifetime. There are rules around how much (annual limits apply), how long the account must be open (15 years), and when it will start (2024).

Catch-Up Contributions

While we all know the need to begin saving early (and that new 529 rule and 401k student loan match will help), it is often the case that critical mid-career years are when so many of us have competing needs that make it hard to save. So, what to do if retirement savings get pushed off? Catch-up! If you are 50+ you can already contribute more than the standard allowable contributions. Starting in 2024, the IRA catch-up limits for ages 50+ will increase indexed to inflation. For ages 60-63, there is a jump to $10,000 allowable catch-up starting in 2025. Note: catch-up funds will be treated as Roth contributions starting in 2024 (allowable exception if compensation is less than 145k). 

Required Minimum Distributions

When it comes time to draw down on retirement funds, Congress is refining rules around required minimum distributions:

1. Starting in January, the age to begin taking required minimum distributions jumps to 73. As of now, they are planning to raise it to age 75 in 2033. 

2. If you hold tax-preferred annuities in your retirement account, the calculation for your required distribution is changing. You will be able to aggregate (no longer need to bifurcate) your account. 

3. If you make a mistake and do not take adequate minimum distributions, the penalty will reduce from 50% to 25%. It is further reduced to 10% if correct in a timely manner. 

In Closing

This act is dense. It’s a lot to digest. There are likely parts of this legislation that may pertain to you that we did not include above. We are happy to dig into the details with you and discuss. 

Secure Act

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I’d Like to Give More to Charity; How Do I Get Started?

Giving to Charity

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