Three American banks (signature bank and Silicon valley Bank included) are in deep trouble after a bank run last week.
What is a bank run?
A bank run is when a large number of customers of a bank or other financial institution withdraw their deposits at the same time over fears about the bank’s solvency. As more people withdraw their funds, the probability of default increases, which, in turn, can cause more people to withdraw their deposits. In extreme cases, the bank’s reserves may not be sufficient to cover the withdrawals.
Why did the bank run happen ? and how likely is it to happen.
The biggest reason for bank runs is because the banks do not reserve all 100% customer money in their vault but just a fraction of it , and in some cases or countries that fraction is too small , like 10% of the total deposit and the rest is invested for some long term .
The possibility of this happening is higher than you thought, that is you only need someone to withdraw 10% of total money at that bank , then it is over.
What Happened With Silicon Valley Bank?
Last week, Silicon Valley Bank failed and was taken over by regulators. On Sunday, another bank, Signature Bank, was also closed. That day, the government stepped in to protect all of those banks’ deposits and create a way for other banks to get access to more cash.
Why did all that happen, and what could happen next? Here are some questions and answers to help guide readers.
Why did SVB fail?
Since the pandemic began, Silicon Valley Bank SIVB had been buying lots of what are often considered “safe” assets like U.S. Treasures and government-backed mortgage bonds. But when interest rates start to rise quickly, as they did last year, their fixed interest payments don’t keep up with rising rates. Those assets were no longer worth what the bank paid for them, and the bank was sitting on more than $17 billion in potential losses on those assets as of the end of last year.
Then last week, the bank faced a tidal wave of $42 billion of deposit withdrawal requests. It wasn’t able to raise the cash it needed to cover the outflows, which prompted regulators to step in and close the bank.
SVB Collapses, is the Second Largest Bank Failure in the U.S. History
And just like what happened to multiple crypto exchanges last year , once one big player goes down most small ones also bite the dust, in this case we have already seen what happened to Signature thank.
Just like wise this is not the end but the beginning of the serious collapse of the banking system. If it can happen to big players what is preventing it from happening to small ones.