The Second Largest Bank Collapse in US History

What Happened to Silicon Valley Bank and Why?

We just saw the second largest bank collapse in US history unfold. Silicon Valley Bank experienced a massive bank run that caused its customers to withdraw $42 Billion in less than 24 hours.

It’s important for you to understand why this is happening and how it could potentially affect you. Here’s what you need to know:

What happened?

Silicon Valley Bank (SVB) was just closed by US regulators and taken over by the FDIC. The bank has been a well trusted financial institution for 40 years and was the 16th largest bank in the United States. Its failure marks the second largest in history only behind Washington Mutual which collapsed in The Great Financial Crisis of 2008.

SVB had more than $200 Billion in total assets and claimed to have been the main financial institution for almost half of all venture capitalist funded startups. This could be bad news for many tech companies and startups out there who had money deposited there.

Why it happened:

The bank had more than half of their total assets invested into treasury bonds which are heavily impacted by inflation. As Jerome Powell and The Federal Reserve have continued drastically raising interest rates to combat inflation, these investments became much less valuable.

The bank quickly realized that they were in trouble and began trying to make up for the losses. They announced on Thursday that they’d sold $22 Billion in securities and planned on selling billions more in company stock. The announcement spooked investors and the stock crashed -60% in a single session. It also caused panic amongst the tech investors and startups who had their money deposited there causing a massive run for the banks.

When everyone tried withdrawing their money all at once, the bank didn’t have enough funds to satisfy all the withdraw requests which is what caused the bank to fail.

What’s worse is that 95% of customer deposits with SVB are not FDIC insured because they vastly exceeded the $250,000 limit. That means there’s now billions of dollars of uninsured deposits now tied up in this mess.

What this means for the economy:

This bank failure could have lasting ripple effects that could be felt throughout the economy. Large tech companies as well as thousands of startups all had their money deposited into SVB. Now most of them won’t have access to their cash reserves for a long time or worse, never again.

This could potentially lead to thousands of layoffs as the companies now may not have enough cash to meet payroll requirements. Other major risks include massive defaults on loans taken out elsewhere and maybe even multiple bankruptcies.

What this means for other banks:

Seeing a bank of this size and stature fail is just another humbling reminder of how fragile our fractional share banking system really is. It’s enough to shake a lot of people’s confidence in our current financial system.

Mass fear can cause a run on any bank, and that’s something to always keep in mind considering none of them would have enough cash on hand to fulfill withdraw requests if it were to happen elsewhere.

The good news is that the average person’s bank account balance doesn’t exceed the $250k limit for FDIC insurance, so most of us would be fine in that worst case scenario.

Something to keep an eye on though is that other banks could be in similar situations with too much bond allocation causing their own future liquidity issues. The Fed has no plans of halting their rate hike cycle any time soon which only adds fuel to the fire.

What this means for you:

No one yet knows what the long term effects this could have on the economy and it’ll likely take months to see them all unfold. But your best course of action is to prepare for the worst and hope for the best.

You should focus on protecting you current income while also finding ways to increase it.

Also be sure to have your emergency fund of 4-6 months of expenses as a financial cushion to help you weather any unexpected setbacks that may occur.

Once you’ve got that, start planning on taking advantage of quality assets on sale. More pain could be coming for the economy causing more downside in the stock market.

Put yourself in a good position to take advantage. We may be about see a generational investing opportunity present itself.

I hope this broke down all of the craziness involved with this news story in an easy to understand way. Knowledge is power so be sure to stay informed! See you all next week.