Over the weekend, Silicon Valley Bank collapsed. The markets are currently breathing a sigh of relief, with the US authorities having bailed out SVB, and the UK arm of SVB having been acquired by HSBC.

Silicon Valley Bank is probably one of the largest banks you haven’t heard of. In the UK, they were fairly small, with just 3,000 customers. But, in its 40 year history, it grew to become the 16^th largest bank in the USA.

At the weekend, another bank, Signature Bank of New York, also collapsed. Signature Bank was closely linked to cryptocurrency, so its collapse is, perhaps, less surprising.

One feature which connects the two collapses is social media. Confidence in a bank can be lost more quickly nowadays, and banks need confidence, as much as anything else, to succeed.

It seems likely now that other banks will come under social media scrutiny, and it’s possible that there will be a loss of confidence in other banks, both in the USA and around the world.

If you have savings on deposit, there are only two ways to protect that money:

• Make sure that you have less than £85,000 per institution, per person, and this will be protected by the UK’s Financial Services Compensation Scheme (FSCS). So, you can have £170,000 in a joint account and benefit from FSCS protection. There are some circumstances, where you may have a higher level of protection – such as the sale of a property, divorce or inheritance.  Remember that some banks share a banking licence (e.g. Halifax and Bank of Scotland, First Direct and HSBC), so this could mean that less of your money is protected than you thought. Small businesses, SIPPs and trusts can also benefit from FSCS protection.
• Invest your money with National Savings & Investments. There is no limit on the amount that is protected, if you invest with NS&I. They have some good rates at the time of writing; their three year Green Savings Bonds and one year Guaranteed Bonds are worth considering, if you can tie money up for that period of time.

Our research shows that there is little to be gained by taking a risk and exceeding the limit for FSCS protection. The most competitive immediate access savings account on 13^th March 2022 was from Chip, paying 3.40%; this was just 0.2% per year higher than the next most competitive account – not enough to risk losing your capital. This was also the case for fixed rate accounts.

Money market funds may also be affected. Most pensions don’t give you access to deposit accounts, but instead give you access to money market funds. These funds invest in “money market instruments” which are similar to bank deposits in some ways, but not protected by the Financial Services Compensation Scheme. So, if one of the banks, in which the money market fund has invested, fails, you could lose money. The funds reduce risk by spreading your money across a large number of institutions and instruments. A quick look at the holdings in some of these funds will give you an education in the names of a whole bunch of banks you have never heard of. On 30^th December 2022, over 4% of the UK’s largest pension money market fund, Standard Life’s £1.25 billion Money Market fund, was invested with Sumitomo Mitsui Banking Corp, whilst St James’s Place’s £927 million Money Market fund had invested 2.92% with Mizuho Financial Group. These figures were taken from Financial Express.

It remains unlikely that any of these funds will be affected by Silicon Valley Bank or Signature Bank, of course, but it does seem that there is not a lot to be gained by putting your money at risk – over the year to 10^th March 2023, according to Financial Express, the average money market pension fund returned just 1.36%, whilst the return from the Bank of England base rate was 2.09%. So, we would suggest that you proceed cautiously, and make sure that you understand the investment you are making.

Where money market funds are concerned, our preference is for funds which give us good information about their underlying investments, and which have been reviewed by independent ratings agencies.

If you would like to know more about whether your deposits are protected or if you have a query about Money Market funds, please contact us.

Philip Wise | philip@sussexretirement.co.uk

Managing Director and Chartered Financial Planner

The value of investments may go down as well as up and you may get back less than you invest.

A pension is a long-term investment and the value is not guaranteed. Any advice or considerations are personal to each individual’s circumstances.

This guide is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.