Rising Interest Rates and Silicon Valley Bank Collapse: What it Means for Average Americans

Pepper here, your favorite finance professional (although Salt might disagree😉), ready to break down what the recent collapse of Silicon Valley Bank and rising interest rates mean for average Americans. Don't worry, I'll try to make this as painless as possible.

What Happened with Silicon Valley Bank?

In case you missed it, Silicon Valley Bank recently collapsed due to taking on too many deposits and being caught by rising interest rates. This has raised concerns about depositor confidence in the banking system. But what does it mean for the average American? In short, A TON.

What do Interest Rates Have to do With Anything?

Interest rates are the cost of borrowing money. When interest rates are low, it's cheaper to borrow money, but you earn less on your savings. When interest rates are high, it's more expensive to borrow money, but you earn more on your savings.

Interest rates can have a significant impact on the economy, including:

• The cost of borrowing for businesses and individuals
• The amount of money people have to spend or save
• The value of the dollar compared to other currencies
• The stock market and investment returns

Silicon Valley Bank invested in long-term debt like Treasury bonds, which promised steady, modest returns when interest rates were low. But when interest rates rose, those investments became less attractive, leading to a loss for the bank. This, combined with a run on the bank as start-up funding dwindled and clients withdrew their money, led to the bank's collapse.

What Does It Mean for Average Americans?

So, how does this affect the average American? Well lucky for us, there are systems in place for these types of crises. Thank goodness we don’t see them often but unfortunately, they do happen. Here are a few key takeaways:

• FDIC insurance protects your deposits. Deposits up to $250,000 per depositor are insured by the Federal Deposit Insurance Corporation (FDIC). This means that even if a bank fails, you won't lose your money (up to the insured amount).
• Interest rates impact your savings and borrowing costs. As interest rates rise, you may earn more on your savings, but it will also be more expensive to borrow money (like for a mortgage or car loan).
• Transparency and accountability are important. Make sure you understand the risks associated with your bank or investment accounts, and look for transparency and accountability from the financial institutions you work with.
• Stay informed. Keep an eye on interest rate changes and how they might impact your finances. Stay informed about the stability of the banks you work with, and don't be afraid to ask questions if you're unsure.

What Happened To The People With More Than $250,000 In SVB?

I'm not going to string you along 😁 - They got it back.

However, Silicon Valley Bank's collapse raised concerns among the depositors who had more than $250,000 in their accounts since the Federal Deposit Insurance Corporation (FDIC) only insures amounts up to $250,000.

But the regulatory bodies have announced that depositors of the failed bank will have access to all their money starting on March 13th, (a collective sigh of relief) which will (somewhat) relieve the stress of depositors.

The FDIC will complete its resolution of the bank, Santa Clara, California, in a manner that fully protects all depositors. The Federal Reserve has announced a new Bank Term Funding Program (BTFP) to offer loans of up to one year to banks, savings associations, and credit unions pledging U.S. Treasuries, agency debt, and mortgage-backed securities as collateral, ensuring that the liquidity of the U.S. financial system stays intact.

Pepper's Takeaways

• Regulators announced depositors of Silicon Valley Bank will have access to all their money starting on March 13th.
• The Federal Reserve is creating a new Bank Term Funding Program to help ensure banks can meet all depositor withdrawals, essentially backstopping all deposits across the U.S. financial system.
• Treasury officials noted there are some institutions similar to Silicon Valley Bank, and concerns about depositors at those institutions remain.

The regulators have assured depositors of Silicon Valley Bank and Signature Bank that their money is safe and they will have access to it. The Federal Reserve's creation of a new Bank Term Funding Program (BTFP) and the use of high-quality securities by the banking institutions will ensure that the liquidity of the U.S. financial system stays intact, and that there are no liquidity pressures in the banking system.

Whelp, that's a wrap - (for now anyway). But we expect plenty more to come from this major fallout. As we continue to navigate this ever-changing financial landscape, it's important to stay informed and take necessary precautions.