How does a modern bank collapse? And is it sudden or is there warning? Seems sudden in the news, but I struggle to understand how a bank can lose billions of dollars suddenly, where does it go?
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Banks take money from customers when they deposit into a checking account. The banks lend this same money out as loans or invest it. So banks never have all the “cash” to pay customers. This isn’t usually a problem, but if a lot of customers want to take out a lot of money all at once then the bank may not have enough money available to pay them. We call this a “run on the bank.” Normally this does not happen because it is uncommon to need all your money instantly.
However, If the people who they loaned the money to don’t pay or in the investments loose value, and the customers find out, then customers will want to be the first to take all their money out so they don’t loose any, the bank will run out of “cash” and then the bank may not be able to pay the slower customers when they come to take their money out. That’s what happened with SVB.
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