Hey everyone. Been seeing a lot of articles about Silicon Valley Bank failing. Says it was the first big bank since 2008 to do so.
How does this happen, what does this mean, what happens next?
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You ask me to hold onto $20 because you don’t have a safe place to keep it. I do. Bob needs to borrow $10. Since I have your $20, I lend him $10 of your $20. Bob agrees to pay me $1 a week in interest, I’ll keep half of that and put half of that into your pile of money.
Normally, this works out well. You have a safe place to keep your money. Bob gets his loan. You and I also get a bit of money in interest from Bob. If you need a couple bucks, you can get it back from me.
But what happens if you want your entire $20 back? Now there’s potentially a problem. I have only $10 on hand. The other $10 is in the form of the loan to Bob. I can’t give you your money. Same thing if Bob can’t pay back the loan – now I only have $10.
That’s a bank failure.
Now Steve comes along and tells you it’s ok; since I’ve been paying him a bit of money for a while, he’ll cover the difference. So you get your entire $20, and he finds someone to take over that $10 loan to Bob. That’s the FDIC.
That’s a very elementary, high level view.
It’s more complex with big banks and while there is a max payout of $250000 per account insured by the FDIC, the FDIC will work to sell accounts, etc to other banks to make sure all depositors get their money.
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