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?
In: 273
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.
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.
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.
[removed]
[removed]
[removed]
This bank targets starts up. They have looser “riskier” profiles they will lend to and offer high returns for accounts.
They were heavily invested in long term bonds.
When the govt started raising bonds, existing bonds become less appealing because they had lower rates. This is important.
When the govt raises the price to borrow, lending slows. Starts-ups….start up less because it expensive. Investment slow, banks taking in less money (assets.)
Now at the same time, the banks clients are feeling the same pressure so they withdraw money from the bank.
The bank now has to sell the bonds it bought at a discount, essentially taking a less to pay back it’s clients.
Multiply this out and suddenly the bank fails because it can’t repay everyone who is asking for their money because they’ve lost money.
Think of this way – pretend 10 people gave you 1000 dollars each a year ago. You put $9000 in the stock market and hold on to $1000.
The S&P has dropped ~8% in the last year so your investment is currently worth $8280
All 10 people ask for their money back.
You cover the first person with cash on hand ($1000)
You cover 8 other people ($8000)
You can only give $280 to the last person.
You now have no money or investment (assets) and you still owe $720.
Youre bankrupt (failed.)
Now the govt comes and steps in (in reality before you’ve sold all your investments) and takes your assets or has a healthy bank takeover. They pay the customers the federally protected amount $250k with any remaining money + govt money. If you were owed more than that you get certificate saying you’ll get the rest if possible, but without certainty and not from the govt purse.
This bank targets starts up. They have looser “riskier” profiles they will lend to and offer high returns for accounts.
They were heavily invested in long term bonds.
When the govt started raising bonds, existing bonds become less appealing because they had lower rates. This is important.
When the govt raises the price to borrow, lending slows. Starts-ups….start up less because it expensive. Investment slow, banks taking in less money (assets.)
Now at the same time, the banks clients are feeling the same pressure so they withdraw money from the bank.
The bank now has to sell the bonds it bought at a discount, essentially taking a less to pay back it’s clients.
Multiply this out and suddenly the bank fails because it can’t repay everyone who is asking for their money because they’ve lost money.
Think of this way – pretend 10 people gave you 1000 dollars each a year ago. You put $9000 in the stock market and hold on to $1000.
The S&P has dropped ~8% in the last year so your investment is currently worth $8280
All 10 people ask for their money back.
You cover the first person with cash on hand ($1000)
You cover 8 other people ($8000)
You can only give $280 to the last person.
You now have no money or investment (assets) and you still owe $720.
Youre bankrupt (failed.)
Now the govt comes and steps in (in reality before you’ve sold all your investments) and takes your assets or has a healthy bank takeover. They pay the customers the federally protected amount $250k with any remaining money + govt money. If you were owed more than that you get certificate saying you’ll get the rest if possible, but without certainty and not from the govt purse.
This bank targets starts up. They have looser “riskier” profiles they will lend to and offer high returns for accounts.
They were heavily invested in long term bonds.
When the govt started raising bonds, existing bonds become less appealing because they had lower rates. This is important.
When the govt raises the price to borrow, lending slows. Starts-ups….start up less because it expensive. Investment slow, banks taking in less money (assets.)
Now at the same time, the banks clients are feeling the same pressure so they withdraw money from the bank.
The bank now has to sell the bonds it bought at a discount, essentially taking a less to pay back it’s clients.
Multiply this out and suddenly the bank fails because it can’t repay everyone who is asking for their money because they’ve lost money.
Think of this way – pretend 10 people gave you 1000 dollars each a year ago. You put $9000 in the stock market and hold on to $1000.
The S&P has dropped ~8% in the last year so your investment is currently worth $8280
All 10 people ask for their money back.
You cover the first person with cash on hand ($1000)
You cover 8 other people ($8000)
You can only give $280 to the last person.
You now have no money or investment (assets) and you still owe $720.
Youre bankrupt (failed.)
Now the govt comes and steps in (in reality before you’ve sold all your investments) and takes your assets or has a healthy bank takeover. They pay the customers the federally protected amount $250k with any remaining money + govt money. If you were owed more than that you get certificate saying you’ll get the rest if possible, but without certainty and not from the govt purse.
The most well-known reason for bank disappointment happens when the worth of the bank’s resources tumbles to underneath the market worth of the bank’s liabilities, which are the bank’s commitments to leasers and investors. This could happen on the grounds that the bank loses a lot on its speculations.
Latest Answers