What Should You Do When Your Silicon Valley Bank Fails?

Facebook
Twitter
LinkedIn

The collapse of Silicon Valley Bank in the early days of March 2023 is more than just a bank failure—it’s a symptom of the times. As the American economy (and, in fact, the global economy) teeters on the brink of recession, chinks in the armor will begin to appear.

This is where Silicon Valley Bank’s failure stops for many consumers. If you don’t live in California, don’t work in the tech sector, and don’t have direct contact with depositors of the bank, how could the failure of a little regional bank matter to you? In fact, what does all this have to do with the insurance industry and the rates you pay every month for a wide range of coverages?

What Happened to SVB?

To keep a long story short, Silicon Valley Bank failed in early March of 2023, leading to a takeover by regulators. The following Sunday, Signature Bank was also shuttered, with the government stepping in to protect depositors.

For those looking for a few more details on SVB’s undoing, SVB was investing in “safe” assets like U.S. Treasury Bonds. While these investments tend to perform well, they are vulnerable in certain situations. For example, 2023 has seen trickling increases in interest rates from the Federal Reserve. As a result, the bank’s bonds suffered deteriorating returns, putting pressure on their cash positions. SVB suffered significant losses in 2022, and were forced to sell securities at a depressed value to meet cash needs.

In fact, the bonds were no longer worth what the bank paid for them, leaving an unimaginable $17 billion in losses at the end of 2022 alone. Then, out of nowhere, the bank was hit with $42 billion in withdrawal requests. It couldn’t raise the cash to manage its deposit demands, and regulators stepped in to close the bank.

What does this do to all the companies investing in or banking with SVB? It strains their credit. The situation was a red flag for depositors, and many depositors panicked. This led to the run on the bank.

What Does the Downfall of SVB Mean for the Economy?

For those keeping score, several dominoes must fall to close a bank. In the case of SVB, the bank:

  • Faced massive losses due to nearly worthless Treasurys and rising interest rates
  • As bond values dropped, cash flow began to dry up
  • Depositors caught wind of the issue and panicked
  • The panic caused a run on the bank (no different than the one we’ve all seen in It’s a Wonderful Life)
  • The bank couldn’t raise the needed cash to cover the depositors’ demands and its business needs
  • Regulators stepped in before it got worse

This may seem simple, but it’s the confluence of several things coming together at once. Some may blame the Fed because it slowly ratcheted up interest rates for well over a year. Raising the rates to the present levels in one or two steps may have avoided prolonged problems and forced SVB and others to address their shortcomings earlier, thus avoiding the cash crunch and run on deposits. The equities markets would certainly welcome more certainty in Fed’s approach to inflation.

Could another bank end up in the same situation? Yes. Signature Bank was closed under similar circumstances two days later.

Other regional banks may be susceptible to these issues. A regional bank could suffer one bad day in the markets, see interest rates change, watch their holdings become less valuable, and end up with a run on the bank. These regional banks may become contagion casualties, as well.

Don’t Panic

No matter what you, as a consumer, see happening in the banking ecosystem, remember that the government leaves several checks and balances in place. The Department of the Treasury moves quickly when banks fail, and the FDIC does protect individual depositors up to $250,000. Some economists believe that this depository insurance number is now too low because increased personal and corporate wealth led to larger deposits in banks.

What Happens Next for SVB, Banks, and Banking Consumers?

The management and board SVB and Signature Bank are already the targets of shareholder class action suits, which were filed mere days after regulators shuttered the banks. These suits allege, among other things, mismanagement, misrepresentation, and a failure of transparency.

Other stakeholders may bring suits against the banks for these very same problems, including clients, employees, and the government itself.

However, just like throwing a pebble into a pond generates ripples, so will these bank failures. Companies, mutual funds, retirement plans and ETFs may have invested in these banks, leading to losses in their portfolios. This may drive Fiduciary Liability and Professional Liability claims against the firms and/or plans for failure to do adequate due diligence. If the plan assets are held by banks in trusts, these may be subject to regulatory control, leading to other Fiduciary claims.

Companies that did their business banking with SVB or Signature may have difficulties getting the cash they need to operate. Consequently, they may not be able to make payroll, make their matching 401(k) contributions, make their corporate benefits payments, or will have forced layoffs or furloughs. These can generate Employment Practices claims and Fiduciary Liability claims. 

These client companies may also have to be transparent on their cash flow problems, leading to deflated stock prices and securities claims against their boards. 

SVB was instrumental in financing start-up companies in the High Tech, BioTech and Health Technology sectors. They also provided capital to venture capitalists and angel investors. As this capital source dries up, so will investments in start-up businesses. The investors in these venture capitalist funds, crowdfunds, and other vehicles may also bring mismanagement, misrepresentation and failure to perform adequate due diligence suits. Furthermore, companies that have agreements with some of these VCs may sue for their capital.

Banking consumers should keep their eyes on the news for:

  • Investigations of SVB and Signature Bank
  • The swath of lawsuits that will descend on both banks

Something similar could happen to any other business if it reaches insolvency. Even if your business (or a client’s business) is performing well, failures of regional banks ripple through the economy:

  • Insurance companies become substantially more conservative as they pay for massive losses and settlements
  • Insurance companies may have similar strains on their investments, putting pressure on their reserves and Surplus Ratios.
  • Businesses who have not properly insured themselves are at greater risk than before
  • Individuals and businesses wonder if their banks are safe leading to other runs.

At the end of the day, it comes down to almost unseen liabilities, how those liabilities are covered, and what businesses can do to protect themselves going forward.

How to Hedge Against Banking Liability

Business owners (and private consumers) deserve to know how to hedge against banking liability aside from carrying necessary insurance coverage. You have every right to go to the bank and ask:

  • What safeguards do you have in place to protect my funds?
  • Is the bank overly-leveraged on low-payout assets?

Insurance agents should ask similar questions. Reach out to your commercial clients and inquire:

  • Where do you bank? Is it a regional bank?
  • Do most of the bank’s deposits come from cash?
  • Or, are those deposits coming from other currencies like crypto?

If the bank doesn’t have answers for you, you may want to look for a new place to do your banking. However, this is not time to make a run on the bank. Do your research, find a good place to do your banking, and move forward.

How Should Businesses Approach Their Liabilities Going Forward?

 Business owners and managers must take the first step by reaching out to a brokerage like The Liberty Company to learn what can be done to protect their operation from a cascade of litigation similar to that which will surely befall both SVB and Signature Bank. With inaction, businesses will suffer because, ultimately, insurance premiums are still cheaper than potentially ruinous payouts.

As a businessperson, you must be honest with yourself about the liabilities you face. There are several insurance policies on the market that address executive perils and significant financial distress. Generally, The Liberty Company recommends that commercial clients carry:

  • Directors & Officers Liability insurance
  • Professional Liability (E&O) coverage
  • Fiduciary Liability policies
  • Employment Practices Liability coverage
  • Cyber Liability insurance
  • Crime coverage
  • Kidnap, Ransom & Extortion insurance

Plus, there are so many things to consider (like a Retro Date protection for D&O or E&O coverage, which, if not backdated to the original policy date, could mean the company isn’t covered against malfeasance that occurred prior to the policy’s activation.) If an expert hasn’t built the policy, you can’t be sure that you’re protected.

Liability Insurance Tips for Small Agencies

If you’re a smaller insurance agency that doesn’t have experience writing this type of insurance, don’t be afraid to reach out to The Liberty Company for help with D&O coverage and more. Experts like Bill Holden are more than happy to help, connect you with the best carriers, and explain how to build these policies.

Insurance agencies and brokerages must also assess carriers, asking:

  • Is this carrier capable of maintaining its ratio of reserves to premiums?
  • If not, will this carrier tighten underwriting and increase premiums for my clients?
  • Will carriers increase retentions, cut limits and add exclusionary wording, even on their own renewals?
  • If not, could this carrier fold under the pressure?

You might love some of the smaller carriers you’ve built relationships with, but if they can’t outrun losses as they once did, are they doing your clients any favors?

Additionally, agents, brokers, and producers of large insurance brokerages like The Liberty Company may turn to their internal experts for help with D&O, E&O, and EPL coverage. If your commercial clients aren’t carrying these policies (or enough coverage,) they need it.

Insure Your Business Properly

Remember, as long as banks continue to lend amongst themselves, review their portfolios, pass stress tests and comply with the regulators, the economy can stabilize. That, however, cannot prevent the failure and closure of other banks.

Reaching out to The Liberty Company Insurance Brokers will provide you with insight into the current state of the economy, liabilities you may face, and insurance coverage your business requires. Experts like Bill Holden consistently generate new solutions for challenges facing businesses across the country, utilizing decades of experience, a deep understanding of the marketplace, a watchful eye on internal and external influences, and a creative approach to turn challenges into opportunities.

Tim Mooney
For 22 years, Tim has specialized in alternative risk financing for workers’ compensation and liability insurance programs with unmatched brokerage services.
Clint Tripodi

Clint has 25+ years of success in HR & Operations consulting with 450+ global high-tech companies.

Looking for Insurance?

See how Liberty can provide you and your business with great coverage and great rates.

1. ZoomInfo Form - Info Request

ZoomInfo Hidden - Contact Info

ZoomInfo Hidden - Company