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 collapse, in general, when they don’t have enough money to serve their despositors’ requests. Banks don’t (normally) keep 100% cash deposits on hand…they loan most of it out and keep a fraction around to serve day-to-day operations. If all the depositors try to withdraw all their money at the same time, the bank doesn’t have that much cash. This is called a “bank run”.
In the case of Silicon Valley Bank, which I assume you’re asking about, there was some warning that they were having issues because a *lot* of their cash was tied up in government bonds that had dropped in value, so they kept having to sell bonds at a loss to operate. This, by itself, isn’t a huge deal…it happens all the time.
BUT…a major venture capital firm that had a lot of money in SVB got worried and pulled all their money out, and told all the companies they were invested in, to pull all their money out because they were getting nervous. This *caused* a run, which became a self-fullfilling prophesy and the bank collapsed. If everyone had just sat still it probably would have been fine, but too many people didn’t want to take that chance. When customers stop trusting teh bank, it goes bad *very* quickly. In this case, less than 48 hours.
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