The collapse of Silicon Valley Bank (SVB) and Signature Bank has been troubling to consumers and the US economy alike. While the fire is slowly being distinguished, the banking crisis will have lasting effects on the economy.
To prepare for the months ahead, here is what you need to know about the US banking crisis and how to prepare for a possible recession.
What are Silicon Valley Bank and Signature Bank?
SVB and Signature Bank are ‘merchant banks’. Merchant banks are financial institutions that serve businesses and very wealthy individuals, unlike consumer banks like Chase or Bank of America, which serve the everyday citizen.
Ultimately, their collapse resulted from poor management decision-making that prioritized short-term gains over long-term returns. This made them susceptible to a bank run, which occurs when many people simultaneously withdraw their money from a bank.
Is my bank account at risk?
More than likely no, your bank account is not at risk. The Federal Deposit Insurance Corporation (FDIC) protects the money depositors place in insured banks in the unlikely event of bank failure. There are two caveats to that coverage.
- Only depository accounts like checking, savings, bank money market accounts, and CDs are covered
- FDIC insurance is limited to $250,000 per depositor. So if you have $500,000 in one bank account, only half of that will be protected.
Remember, SVB and Signature don’t operate like your average bank. Most depositors have millions of dollars in their bank accounts which is why their funds are not protected by the FDIC.
Will the banking crisis result in a recession?
The short answer: possibly. But we know that despite all of the latest projections and in-depth research, no one can predict the market.
Experts are, however, anticipating that the economy will fall into a recession later this year due to the catastrophic effects of the banking crisis. The fall of SVB and Signature Bank, along with inflation, high-interest rates, and lower income, is the perfect storm for a recession.
How can I prepare for the possibility of a recession?
You may not be able to predict a recession, but you can prepare for one and build strong financial habits today. There are many ways to prepare for a recession, but here are some top strategies to consider:
- Review your spending habits: It’s time to look closely at your credit card statements! As the possibility of a recession looms, it’s important to cut out unnecessary spending when able.
- Create a budget: No one likes the idea of budgeting, but everyone tends to like the outcome of it. After reviewing your spending habits, the natural next step is to create a budget to accomplish your spending and saving goals.
- Build an emergency fund: An emergency fund is crucial whether a recession is near or not. Life is unpredictable—people get laid off, sick, or injured, and an emergency fund can help get you through those times. Experts recommend having 3-6 months of total living expenses in your emergency fund.
- Eliminate credit card debt: High-interest debt like credit cards can spiral out of control fast. Focus on paying off high-interest debt and adjusting your spending habits if needed to do so.
A stronghold solution in Hedgehog Investments
In a time of crisis, many investors will either pull all of their investments or search for ‘safer’, more reliable investment opportunities. Alternative investments are a great option during uncertain times because their success does not directly correlate to the stock market’s swings.
Hedgehog’s investment model is unique. We don’t work with merchant banks like SVB or Signature. Rather, we have strong relationships with all major consumer banks to ensure preferable rates and faster funding than the average person. And because we work with several major consumer banks, if one did experience trouble, we have many others to work with when seeking financing for our business clients.
Get in touch with our team to learn more about our alternative investment model and how you can better prepare for the possibility of a recession.