John Martello, Copy Editor
On March 10, 2023, it was reported that Silicon Valley Bank (SVB), had lost $1.8 billion of its portfolio. This marks the largest bank failure in the United States since the Great Recession. This has left people wondering: will I lose my money? How did this happen? To help everyone understand what happened with SVB, we’ll dig a little deeper into the banking system and the events that triggered the collapse.
For starters, how much money do banks hold? Well, it is rare that banks have the amount of money that matches what is in your account. The primary function of banks is not to just hold deposits but to use them for loans, investments, credit cards, and government bonds. In other words, if you have $10,000 in your savings account, it is rare that a bank holds that amount dollar-to-dollar. The bank might hold $5,000 and use the other half to loan to businesses or the government.
This is where the trouble occurred with SVB. As the tech industry started to cool its profits, many companies began to withdraw funds quickly. This triggered what is known as a “bank run”, or a rush to withdraw money. Because SVB had taken on huge amounts of long-term investments, the bank did not have the money to match the withdrawal demands. SVB attempted to raise capital by selling bonds and the bank itself, but this failed. Eventually, the Federal Deposit Insurance Corporation (FDIC) stepped in.
FDIC is a government corporation that offers deposit insurance for bank users. Under the FDIC, uninsured depositors with accounts up to $250,000 will receive a dollar-to-dollar match. However, this deposit match has recently been the subject of Congressional debate, as several lawmakers are looking at increasing the insured deposit cap to more than a quarter million. As this bank failure just occurred, talks are still in the early stage, and we will continue to monitor this situation.
So, what is troubling about this? The main cause of concern for depositors is the fragility of the banking system. Under the Trump administration, the federal regulations of banks loosened, which caused Congressman Bernie Sanders to place the blame mainly on Trump. However, the Federal Reserve System, the central banking system of the United States, is launching an investigation into the internal management of SVB. Investigators have found that SVB had no Chief Risk Officer, a pivotal executive role for banks. Furthermore, higher inflation rates issued by the Fed, made it harder for SVB to accumulate capital when needed.
Regardless of the reasons for the collapse, this issue has become one that worries lots of people around the world. If we have no trust in our banking system, then it could offset the entire global economy. However, many economists are calming global fears, sharing that this is just a hiccup in the banking system. We will continue to monitor this issue closely as it progresses.