The Silicon Valley Bank (SVB) has suddenly collapsed. As of the end of last year, the bank had 175 billion dollars in deposits, and approximately 151 billion dollars of those deposits were uninsured. The Federal Deposit Insurance Corp, FDIC, insures all bank deposits nationwide up to $250,000. If you had more than that in this bank, and a great many Tech start-up companies did, and the bank does not have sufficient assets to cover it, you lose. Getting back $250,000 while losing tens of $millions will not save your company.
This may be a Major Extinction Event for small high-tech startup companies. That’s very bad, but it may be even worse. These big banking corporations issue stocks that investors buy. The stock value of SVB has plummeted to nothing, so all those who invested in it have lost their money and this has caused a panic among other investors in other banking stocks, who are now unloading their stocks.
Large depositors in other major banks are withdrawing their funds, and a national run on the nation’s largest banks could collapse the banking system, which would result in the collapse of major corporations of all types, shutting down business and industry and putting almost everyone out of work. This thing could snowball.
Yesterday, March 10, 2023, “Secretary of the Treasury Janet L. Yellen convened leaders from the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency to discuss developments around Silicon Valley Bank. Secretary Yellen expressed full confidence in banking regulators to take appropriate actions in response and noted that the banking system remains resilient and regulators have effective tools to address this type of event.”
So right now, they’re on it, but that doesn’t mean they’ll fix it, because here’s what caused it:
The increase in the Federal interest rate on bonds has made the earlier bonds sold with interest rates of 1% or less, of much less value, because inflation has devalued the dollar. Why would you buy a bond that pays 1% interest when inflation keeps making the dollar worth less. You want bonds that pay higher interest so you can make a profit or at least keep up with inflation.
Banks own $Trillions in Federal bonds at very low interest rates. SVB was heavily invested in these bonds too, and told their depositors that they needed $2.5 Billion to balance their accounts. People lost confidence in them and started taking out their money, and in two days the bank had collapse and was taken over by Federal regulators.
Many other really big banks also have lots of these non-salable bonds that they put their depositors money into as a safe place to keep it. These bonds have time limits before the government has to redeem them, 10 years and more, so the banks are stuck with them until they can be sold back, and meanwhile the depositors money is frozen in them and unavailable to be withdrawn.
Most banks operate on only about 10%, AT MOST, of the actual deposits in cash. All the rest is out on loans and invested in bonds. So if people panic and start pulling all their cash out of the banks, the banks will collapse and so will the entire US economy, and it will happen literally within a few days from when it starts.
Stay tuned………