On March 10, Silicon Valley Bank (SVB) failed after a bank run, marking the second-largest bank failure in United States history and the largest since the 2007-2008 financial crisis.
“Big deal,” you might think, “that happened all the way in the US, while we are here in Malaysia.”
While it is true that the SVB collapse doesn’t affect Malaysians directly, there are certain lessons that can be learnt from this incident. Here are five takeaways.
1. The role of PIDM
Did you know that in Malaysia, the savings you put into the bank are insured by Perbadanan Insurans Deposit Malaysia (PIDM) for up to RM250,000 per depositor per bank?
Similarly, many of SVB’s clients had their deposits protected by the Federal Deposit Insurance Corporation (FIDC) for up to US$250,000.
Simply put, if you have RM250,000 into your savings account, you will get this amount back from PIDM in the event the bank is unable to give you your money back, for whatever reason.
Most commercial banks in Malaysia fall under PIDM coverage, although some smaller banks do not. For a comprehensive list of the banks covered by PIDM, click here.
2. Learn what a bank run is
Imagine being in line at the bank and overhearing people complaining about not being able to withdraw their money. You rush to demand for your money bank, while those around you start panicking, too.
The bank says it doesn’t have enough money to pay everyone, which just makes things worse.
A bank run is exactly what happened to SVB. Too many people were asking for their money back, but the bank did not have enough cash. Panic set in, exacerbating the situation.
This has actually happened before in Malaysia back in 1999, when MBf Finance struggled to give money back to their customers and Bank Negara Malaysia had to step in.
A bank run is out of one’s control – it just takes a small panic among some depositors to trigger a big crisis. However, you can take some precautionary steps, which leads to:
3. Spread your savings
There’s that old adage/cliché about eggs and baskets, and this is true when it comes to your savings: don’t put all your money in just one bank!
Some of SVB’s clients did just that, and while the FDIC does provide insurance on their deposits, remember that this only covers up to US$250,000. For the customer who put in US$500,000, that’s half of their savings wiped out.
PIDM’s coverage applies to one deposit per bank, so if you divide your RM1 million in savings across four banks, each amount would be covered individually.
4. Make sure your bank is safe
How do you even know whether your bank is “sound”? Most people simply assume that big financial institutions are reputable, and the everyday person on the street is not likely to delve into the bank’s financial statements, balance sheets and whatnot.
The most straightforward way to find out if your bank is safe is by answering this question: is it profitable?
This would mean, in the past three to five years, it has been making consistent profit and not loss.
If your bank has been doing well, there is little to worry about. In the SVB case, the bank reported a whopping US$1.8 billion (RM8 billion) loss on its bonds portfolio.
5. Find out what the bank does with your money
Banks typically make money by loaning out customers’ deposits to people who need to buy major assets, or to invest in shares and bonds with the goal of making more money when these investments do well.
SVB invested its customers’ money into US government bonds. And when the Federal Reserve increased interest rates, bond values went down significantly, leading to that massive loss.
Hence, you could do some research on what your bank does with your savings. A simple summary of the bank’s loans and investments would tell you the percentage of its investments in relation to total assets.
SVB’s ratio was 57%, which means more than half of its assets were in investment – a risky situation indeed. A 10-20% ratio is considered strong and safe.
This article was written by Su-Wei Ho for MyPF. To simplify and grow your personal finances, follow MyPF on Facebook and Instagram.