Early March 2023, people woke up on their weekend to the shocking news that we were now facing the second-largest bank collapse in US history. 

Once it happened, the media scrambled to push the stories, and social media buzzed with rumors and speculation. But what is this all about? 

The collapse of Silicon Valley Bank has had far-reaching implications for the banking industry and the overall economy. Let’s cut through the noise and see what really happened and what it means for us! 

What Caused the Collapse of Silicon Valley Bank

To understand the collapse of Silicon Valley Bank, we need to first understand how banks make money. Banks make money by taking in customer deposits and lending out most of that money to other customers at a higher interest rate. 

The difference between the interest rate the bank pays depositors and the interest rate it charges borrowers is known as the spread, and it's how banks profit.

However, banks are required to keep a certain amount of their deposits on hand in case customers want to withdraw their money. This is known as the reserve requirement, which the Federal Reserve typically sets. 

For example, if the reserve requirement is 10%, a bank must keep $1,000 in reserves for every $10,000 in deposits it takes in. The rest of the money can be loaned out.

So far, so good. But what happens when too many customers suddenly want to withdraw their money all at once? It causes what’s known as a "run on the bank," which can be disastrous. 

Remember, banks lend out most of the money they take in, so if many customers want to withdraw their money simultaneously, the bank may not have enough cash to meet those demands.

This is exactly what happened to Silicon Valley Bank. According to reports, over 35,000 depositors wanted their money back, and the bank simply didn't have enough cash on hand to meet those demands. This led to a panic among depositors, and soon the bank was inundated with a massive amount of withdrawal requests.

To make matters worse, SVB had invested heavily in a bond portfolio that was no longer worth much. As interest rates rose, the value of those bonds plummeted, leaving the bank with significant losses. This made it even more difficult for the bank to meet its customers' demands for cash!

Ultimately, the Federal Deposit Insurance Corporation (FDIC) had no choice but to step in and seize the bank. Depositors were protected by FDIC insurance, which guarantees deposits up to $250,000 per account. However, it's worth noting that some depositors with large balances may have lost some money in the bank's collapse.

What the Crash Means for the Economy

The bank's collapse may lead to inflation, as the money that depositors lose will need to be printed to make them whole again. This could exacerbate the existing inflationary pressures in the economy.

Moreover, the bank's collapse could also impact the Federal Reserve's decision-making regarding interest rates. Before the collapse, there was speculation that the Fed would increase interest rates by 25 basis points, but now there is uncertainty about whether they will go through with the hike. 

The Fed must weigh the recent pain caused by the bank's collapse against the potential impact of increasing interest rates. The problem is that interest rates alone will not solve the inflation problem. Ultimately, this could lead to a rise in taxes as one of the only solutions.

Opportunity in the Market

While the market may be scared of the uncertainty the bank collapse caused, we can’t ignore the potential opportunities it opens up. 

The collapse of Silicon Valley Bank had a significant impact on mortgage rates in the short term. Mortgage bonds are often considered a safe haven during times of fear and uncertainty, and the lack of trust in the banking system following the collapse led to a flight to safety. 

This resulted in a considerable improvement in mortgage rates, with the 10-year rate falling from 4% to below 3.5% in just a few days. However, the longer-term impact of the collapse on mortgage rates is not yet known. 

Bottom Line

The collapse of SVB has had far-reaching implications for the banking industry and a ripple effect on the already fragile economy. It serves as a reminder of the importance of proper management and oversight in the banking industry and the need for regulatory oversight. 

Finally, it serves to warn about the impact of rapid interest rate increases and the importance of contingency plans and diversifying revenue streams.

Do you want to know more about the collapse and critical details happening behind the scenes? Be sure to tune into the full episode to find out more!