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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Banks don’t just store the money that people deposit. Depending on the bank, they loan it out to others (mortgages, car loans) and/or invest it and make profits off the interest and investment growth. They keep a relatively small amount of deposited cash as a reserve to cover withdrawal requests.
Sometimes (hopefully very rarely) something causes a crisis of confidence for a bank’s customers and a whole bunch of them try to withdraw their money at the same time, exhausting the bank’s reserve. This is called “a run on the bank.” When a bank can’t meet its customer withdrawal obligations, it fails. (Watch the movie: “It’s a Wonderful Life”)
In the US the FDIC insures bank accounts up to $250k each so customers will eventually get at least some of their funds back.
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