Reaction & Commentary
One of the largest U.S bank failures ever in history however what makes this so much worse is that even though it might seem like an isolated event once you begin digging deeper you’ll begin to realize that this is a huge blind spot for the entire banking industry with the
Saying too big to fail possibly being tested again soon so let’s talk objectively about exactly what’s happening if your money is safe how the entire banking system could be vulnerable if people begin to withdraw their money all at the exact same time and then finally what you could do about
This to make sure you’re best protected although before we start as usual if you appreciate the information it does help out tremendously if you subscribe and if you want to be kept up to date on topics just like this before I’m able to make a full video on them I do have a
Newsletter Down Below in the description it’s totally free it costs you nothing it’s just the information so thank you guys so much and now that said let’s begin alright so to start we gotta talk about silicon Valley Bank this was a company founded in 1982 and they quickly became a prominent lender throughout
Silicon Valley while catering almost exclusively to venture capital essentially this became the startups Bank where CEOs and businesses would go for funding and for the last several decades that worked out incredibly well until recently and you’re going to want to follow along in 2020 when interest rates were reduced to zero and stimulus
Measures were put in place both Banks and people were flush with cash and almost all of that funneled back into the banking system which is where things began to go wrong see Banks currently operate on what’s called fractional Reserve banking this means that banks are required to keep at least 10 percent
Of their customers money available at all times for withdrawals just imagine it like this you give me your thousand dollars to hold on to for safe keeping but I could turn around to give 900 of that to somebody else who could give 810 to somebody else who could give 729
Dollars to somebody else under this situation Banks hope that enough people give them 1000 dollar deposits so that when the first person wants their money back they’ll have enough cash on hand to process that withdrawal the benefit to doing this is that this allows their customers access to a much larger pool
Of money and they’re able to earn interest on their deposits but that also relies on everyone having faith that the system works and not all pulling their money out at the exact same time which has started to happen now to be fair in most cases Banks aren’t lending to other
Banks who lend to other Banks who lend to other Banks instead Banks often take your money loan out a portion of it and invest the rest in really really safe and stable Investments like U.S treasuries this ensures that as long as those treasuries are held to maturity
The bank gets near the guaranteed rate of return customers could be made whole and everyone wins except in this case and here’s why in 2021 and early 2022 Silicon Valley bank took roughly a hundred billion dollars and invested that into government-backed bonds with a significant portion of that locked away
For three to four years at an interest rate of just one point seven nine percent essentially this meant that Silicon Valley bank took a massive bet that the Federal Reserve was not going to raise interest rates as fast as they did and when they turned out to be wrong
That put them in a very dangerous position see bonds like this are valued based on their yield and in this case Silicon Valley Bank was on the wrong side of the transaction to lose a lot of money just imagine it like this as an example Silicon Valley bank took a
Hundred dollars and bought a two percent interest rate for four years as long as they could hold it for the full four years they’ll receive a hundred and eight dollars and 24 cents back and be paid in full no problem whatsoever but what would happen if interest rates
Suddenly increased right after you made your investment and all of a sudden you could buy that exact same 100 at a seven percent return and make 131 dollars over this exact same four years well in that case sure hundred dollar two percent Bond would have to decline to 77 is to
Be worth what you could buy at today’s prices and if you can’t afford to hold out for the full four years to get your money back you’re going to be forced to take a loss and that’s what’s starting to happen and normally Banks would have enough Capital coming in from a variety
Of sources to cover customer withdrawals but in this case Silicon Valley Bank’s customer base or mainly technology companies which have seen significantly less funding and that means that their companies are forced to take more money out of the bank to pay for their own expenses essentially Silicon Valley
Banks severely misjudged the size and pace of the federal reserve’s rate hikes while assuming that the Venture Capital Market would continue to stay strong that left them in a situation where they locked too much of their money away in one specific asset that yielded too low
Of a return and that occurred at the exact same time their customers began withdrawing more money than they anticipated this of course is where the dominoes begin to fall on Wednesday March 8th the company announced that they would be selling off a third of their ownership in an effort to raise
2.25 billion dollars this was done in response to them being forced to take a 1.5 billion dollar loss on a portion of their bond position which was done to bring enough money back to the bank to be able to continue processing withdrawals the problem however came on
March 9th when Ward got out that the company could potentially be facing insolvency issues and as a result their stock price plummeted more than 60 percent making it unlikely that the company would be able to raise additional Capital to help plug the losses at that point the entire situation devolved into a full-scale
Panic it was reported that their CEO had been calling clients to assure them that their money with the bank is safe well startup Founders had been advised to pull their money out as soon as possible just in case but overnight things got even worse on the morning of March 10th
Silicon Valley Bank announced that they had failed to raise capital and instead were looking for a buyer meaning they quite literally ran out of money had more withdrawals than they had cash on hand and were looking for anyone who could potentially take them over unfortunately though that seems like too
Little too late because just a few hours after that Silicon Valley Bank was shut down and closed by Regulators with the message that all of the bank’s deposits have been transferred to the new Bank of course you might be thinking to yourself FDIC Insurance exists for a reason and
They should be able to recover up to 250 thousand dollars almost immediately except uh yeah that’s another problem here’s the thing is most of you know anytime you make a deposit within a bank you’re protected by what’s called FDIC insurance which protects up to the first two hundred and fifty thousand dollars
You have deposited in the event of a bank failure this was created after the bank runs the 1920s Great Depression as a way to incentivize people to re-trust the banking system and it largely worked since then FDIC insurance has continued to evolve for any Bank who wants to
Legally operate in the United States and the good news is that it’s a fairly efficient system in fact their website says that you could get access to your money within a few days after the bank’s closing however in this case the bad news is that as Genevieve from grit
Capital points out only two point seven percent of silicon Valley’s Bank deposits are less than two hundred and fifty thousand dollars meaning ninety seven point three percent of their money is not FDIC insured and it’s not clear exactly what’s going to happen to all of that money now typically in cases where
Deposits exceed the FDIC limit losses are recovered in a bankruptcy court when assets are sold off to pay their creditors but his bank rate explains that process could take several years to complete and more than likely their customers are not going to receive all of their money back from what they
Started with although to me that isn’t even the worst of it instead it’s just how far this is about to reach over the coming few days and weeks and I have a feeling this is really only the tip of the iceberg for those in aware Silicon
Valley Bank isn’t just a bank for the average person they’re the bank for a significant portion of venture-backed companies throughout the United States and when those businesses keep a significant portion or even all of their money with one institution they could be completely wiped out overnight the reality is many of these institutions
Have raised millions or even tens of millions of dollars with the expectation that that’s going to be enough to last them throughout these next few years those businesses have carefully saved money kept it liquid for emergencies and have spent it wisely only to have it reduced to 250 000 overnight from that
Perspective this is going to be crippling to every single business that banks with Silicon Valley Bank especially since they currently hold more than 342 billion dollars worth of customer funds now realistically a startup is not going to lose all their money with the bank and it’s not like
Every dollar over 250 000 is suddenly worth zero but it could take years to recover whatever’s left and whether or not the company has enough money to stay afloat in the meantime is completely up in the air I would venture to say that most of them cannot just consider that
Everything from payroll company expenditures and all of their overheads could be held in One bank and 250 000 could be a drop in the buck pocket for a company who had saved significantly more to make it through a time of slower growth there’s really no way out of this
With the exception of trying to raise cash as desperately as possible in a panic at a discount downsizing significantly or going under which is something that no one thought would happen just a week ago so that then of course begs the question could the same thing happen to your bank the answer is
It’s possible but it’s unlikely the issue with Silicon Valley Bank was that they were in a niche market servicing startups and were funded by Venture Capital which was drying up that meant that very little money was flowing in a lot of money was flowing out and the majority of the bank’s Capital was
Locked away in bonds for the next four years at a low interest rate that had declined in value essentially this meant that if the bank were to wait long enough they would have enough cash on hand and potentially absorb the short-term losses but when everyone begins withdrawing all of their money
All at the exact same time the bank is left with no other choice other than to shut down now sure in essence every every single Bank operates this way and is only required to keep 10 percent of customer funds on hand at all time to process withdrawals but in Silicon
Valley Bank’s case they went all in on the bond market at the worst possible time at the very Peak well their customers were moving money out of the bank during a time where they needed capital and wanted a higher return it was really a perfect storm for most
Other Banks though the FED Bice chair recently said that there are obviously larger institutions that are also exposed to these risks too but the exposure tends to be a very small part of their balance sheet so even if they experience the same deposit outflows they’re more insulated that’s why I
Think in order to best protect yourself you should never keep more than what’s insured from the FDIC which is typically two hundred and fifty thousand dollars for an individual bank or stick with one of the larger institutions who’s more likely Diversified and more likely to be
Okay for almost all of you watching I would venture to say that it’s probably not going to make any difference whatsoever because most people don’t keep more than two hundred and fifty thousand dollars in cash in any given bank but in the big picture it’s a very
Good example that you should never keep all of your eggs in one basket you should always have multiple accounts in good standing with other Banks just as something to fall back on and at the end of the day sometimes things could happen that are completely outside of your
Control even if you do everything right as far as what happens next is really anybody’s guess it’s still unclear if it’s possible for another bank to swoop in and buy them up or if Silicon Valley Bank is deemed systemically too big to fail while the government steps in to
Prevent what could potentially be tens of thousands of employees losing their jobs and companies going under or if they’re going to be forced to go through bankruptcy with 97 of their customers waiting to see what’s going to happen personally I have very mixed feelings on this first I find it surprising that a
Bank would have the ability to lock away a substantial portion of their assets and essentially bet their customers money on the decisions of the Federal Reserve to me no Bank should be legally allowed to take such a sizable risk and there should be more regulation in place
To make sure that deposits are properly Diversified second the FDIC limit of 250 000 makes absolutely no sense to me when 97 of their depositors were above that amount to begin with I think the business accounts should have access to significantly higher limits since after all they have operational expenses
Payroll and overhead to meet not just as an individual but for an entire company that also supports tens or even thousands of employees in that case it would make way more sense for the FDIC limit to be based on a percentage of what that person deposits I mean let’s
Be real a business is not operating a 10 million dollar bank account the same way an individual would who’s probably never going to see 250 000 cash in their lifetime that’s why I think it makes way more sense to base the FDIC limits on a percentage of what they have deposited
Or an average account balance just in case something happens like what we just saw but again all of this is likely too little too late and the best that we could do right now is just to wait and see what happens so with that said you
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