How the recent bank collapses can affect retirement accounts

Several banks have failed in recent weeks, but remedies were quickly put in place and clients were made whole. Industry experts say there is no reason to panic, but there are many reasons it should warrant your attention.

The stock market expresses what we all feel about two banks this month that have failed. It’s uncertainty. And when things are uncertain, it affects the stock market and your retirement fund, and it destabilizes regional banks, which are important to local economies - which means your community.

Signature Bank out of New York collapsed first, then California’s Silicon Valley Bank. The latter earning an historic distinction.

"This was the second-largest collapse of any bank in the history of bank collapses in this country," said the president of Longevity Financial, Bradley J. Rosen. 

He says the perfect storm created this: loosening of government oversight, rising interest rates, and a specific banking clientele.

Silicon Valley Bank catered to the start-up tech businesses. Interest rates have been steadily rising. So, company’s needed to dip more than ever into their funds at the bank.

"So very quickly, a large number of deposits were coming out of the bank into those companies hands," Rosen said. "That was the first signal that, whoa, there is a lot more money needing to come out than what was coming in"

In SVB’s case, it had to turn to its own savings, if you will, a Treasury bond. But rising interests did them in again. That 10-year bond wasn’t worth what it used to be.

"They wound up taking an almost $2 billion loss on just trying to get the money out to everybody," he pointed out. "This is a classic definition of interest rate risks."

The Feds have raised interest rates to cool inflation, but it comes with risks that can cause some instability. But the Dodd-Frank Act, created after systemic banking collapses in 2008, was there to catch banks in trouble. The problem is in 2018 some of the oversight from that act was repealed.

Bradley J. Rosen explains, "We all want to remove bureaucratic tape and redundancies and excess, right, in the business world."

Until we need it again.

Then, Silicon Valley Bank management made a curious PR move that caused a mild panic. 

It turned out that SVB bank announced they had to sell these Treasury notes and take this bath. So what happened next? The run on the bank."

The rescue was swift. The FDIC, which insures your money up to $250,000, made everybody whole, even if clients had more than that in the bank. Several giant banks jumped in to make loans to another mid-sized bank in trouble, to avoid another collapse. And congress is considering patching up the Dodd-Frank revoked safety net with the Secure Viable Banking Act.

Interest rates, banking laws, and a hundred other moving parts keep the system in balance. Sometimes, it wobbles. And we will see more rules to help stabilize it.