On March 10, 2023, Silicon Valley Bank (SVB) failed. This was the second-largest bank failure in American history. SVB primarily served tech industry start-ups and they were widely considered an important part of our nation’s banking sector. The failure of SVB is likely due to many causes and events but the underlying cause is simple: They did not have money when they needed it. 

SVB, cash flow, and personal financial planning

This is intriguingly simple but also confusing. To help explain, I like to provide an analogy between prudent bank management and prudent individual financial planning. The analogy is instructive for both understanding bank failures and also understanding what you can do to improve your personal financial security. 

When most people think of bank failure, they usually think of unqualified borrows or risky derivatives. This is certainly one way a bank fails, but there is another, more basic threat to any bank’s operations. Specifically, investment timelines must match needed-use timelines. For example, banks should not invest in long-term assets if they need or might need the money in the near term. This is called liquidity planning or asset-liability management. 

In other words, it comes down to cash flow and timing. Cash needs to be available when you need it.

The importance of asset-liability management

The same holds true for individuals. We need to plan and adjust our use of money and our investment decisions based not only on how much we are going to spend but also on when we plan to spend it. 

If we know we need money in six months because we plan on buying a house and a house purchase requires a down payment, it would be unwise to put the down payment money into risky long-term investments, like the stock market. While the stock market is a great long-term investment, it might lose value in the near term. 

Most people understand that even if an investment is a good investment over the long term, the short term is very volatile and a prudent person would not risk the down payment for their house on a long-term stock investment. Similarly, as it relates to retirement planning, the closer you get to retirement, the less risk you can afford to take with your retirement nest egg and the less you should have invested in long-term investments like the stock market. 

Long-term investments vs short-term needs

While there were other factors at play and there is still a lot we do not know, unfortunately, lack of liquidity planning and poor asset-liability management appear to be the main causes of the SVB bank failure. SVB needed money but the money they needed was invested in long-term investments. 

For the same reasons you do not invest your new home down payment in long-term investments, banks should also not invest liquidity needed to cover deposit withdrawals in long-term investments, but this is what SVB appears to have done. Then, when SVB needed the money, they were forced to sell their long-term investments at a loss and they did not have the money needed to survive.

The problem of risk in liquidity planning

Some people might argue that these situations are not analogous because no one can predict a “run on the bank,” and banks should invest for the long term. However, not all banks are created equal, just like not all individuals have the same financial situation or job security. 

SVB had a concentration of deposits from risky tech-sector start-ups. They should have known that these deposits were less stable than traditional banks. Therefore, they should have been more conservative with their liquidity planning. Similarly, as individuals, prudent financial planning includes exercising financial discipline and saving an emergency reserve of cash that is sufficient to weather a storm, especially if you have a risky job. 

As with all things, accurate information is crucial for both business and personal financial planning and decision-making. Using programs like Quicken or Simplifi by Quicken can help you stay on budget and on track to meet your savings goals … so you have money when you need it!