Bananas and Bank Runs
By now, you’ve likely heard about the bank run on the Silicon Valley Bank and the subsequent failure and bailout of that bank. You may have also heard about the failure of an unrelated bank in New York, Signature Bank, and about the bailout of the depositors at these two institutions. As with anything in the world of business and finances, the complexities of the bank run, bailout, and expected fallout will be very complicated and by the time they’re fully understood, will likely be forgotten. However, through the magic of AI, I came up with another solution to explain the bank run, hopefully it is more concise and informative than anything I could write.
Hopefully that cleared some things up, and if not, I’ve got a less banana-e explanation below.
Whether you were aware of it at the time or not, you just lived through the second biggest banking run in United States history. On March 9th, depositors started lining up to withdraw funds from the Silicon Valley Bank, a bank which made their name as the preferred bank of Silicon Valley start-ups and small entrepreneurial businesses in California. By March 10th, SVB’s stock had tanked and they were insolvent on funds needed to pay back depositors. Over the weekend, the Federal government stepped in and declared that all depositors would be getting their deposits back, even those above the FDIC insured amount of $250,000. However, this was not before an unrelated NY bank, Signature, was closed by state regulators fearing that they would be unable to withstand a bank run of their own.
In addition to acting as a depository, banks are engaged in many of their own transactions aimed at bettering their financial position, making more money, and benefiting their shareholders. Though their risk tolerance is likely different than yours, banks only keep a fraction of client deposits on hand and loan out or invest the remainder in an effort to make more money. This is why you get a (minuscule) amount of interest paid on your savings account with many banks.
SVB, known for potentially risky investments, bought 21 billion dollars’ worth of bonds back in 2019 when interested rates were comparatively low – according to the NYT the average interest rate on that purchase was a measly 1.79%. As interest rates have risen significantly since then, these bonds have become progressively less valuable and were weighing down any potential returns for SVB. When a credit rating agency started to consider downgrading SVB as a potential investment due to poor performance, they sold their bond portfolio at a 1.8-billion-dollar loss.
To cover this shortfall, SVB then sold some preferred stock and investors panicked. While selling preferred shares to cover investment losses is certainly a poor move, and one potentially made under duress, it is not indicative of a bank failure on its own. However, when depositors heard about the losses and subsequent shortfall, they ran screaming to the bank to withdraw their funds.
Depositors are insured by the FDIC for $250,000 per account type and per person against bank failures. Meaning that if Bank of ______ went under tomorrow and you had $300,000 in your savings, you’d get $250,000 back. This extends to joint accounts so both owners (typically spouses) could each be insured for $250,000 apiece and then $500,000 in a joint account – this does, however, only extend to deposits sitting in cash. Investments in equity are not covered as those are speculative risks. Many depositors in SVB were businesses, and as such were over this threshold. So they wanted to get their funds out before they would be unable to and lose the balance above this threshold.
As mentioned earlier, banks are not required to hold 100% of deposits in cash at the bank, they are free to invest it or loan it out – this is why you get an interest credit on your cash savings. While there is typically a reserve requirement for banks to hold X% of deposits in cash, this is a tool that the Federal Reserve can and will use to stimulate the economy in times of need, such as March 2020. Since then, the reserve requirement has been at 0 for banks in the US, allowing them to loan more money and hopefully stimulate the economy but also meaning that they likely have insufficient reserves on hand in the event of a bank run. And that’s exactly what happened.
The Federal government acted rapidly to assuage the fears of depositors at banks country wide when they stepped in and announced that deposits above the FDIC insured limit of $250,000 would be returned in full to the depositors. Though the government stepped in quickly, they didn’t act before Signature bank in New York state was closed by state level regulators fearing that a domino effect could start and that they would not be able to handle a bank run.
Biden and other government officials emphasized that this bank bailout will not be paid for by taxpayer dollars and instead will utilize fees paid by banks to restore depositors to their former status. While some commenters are doubtful, this sentiment has been echoed by both sides of the aisle.
So, what does all of this actually mean for your bananas? Well thankfully nothing. Unless you were banking at SVB or Signature with over $250 thousand in your account, nothing should change in your financial picture. Banks are still solvent and hopefully this was a warning which will be headed by regulators and bankers alike. Banks may reduce their already low interest rates credited to your savings account, offering opportunities to place those short term and safety dollars elsewhere but nothing much will affect your financial picture.
One last thing to note: Stablecoin, a crypto that has a 3.3-billion-dollar exposure to SVB, and there is fear that the bank run may contribute to an already tumultuous year for crypto. Consult with a trusted financial advisor regarding any potential crypto holdings or before you make any changes to your bananas.