A major bank has collapsed in the U.S.: What does this mean for the wider economy?

Silicon Valley Bank collapsed, marking the largest bank failure since 2008. Find out how it happened and its impact on the US economy.
A major bank has collapsed in the U.S.: What does this mean for the wider economy?

Over the weekend, Silicon Valley Bank (SVB) collapsed, marking the largest bank failure since the 2008 global financial crisis. Customers were left unable to withdraw any of their funds. However, this morning, the U.S. Treasury and Federal Deposit Insurance Corporation announced it will refund 100% of customers’ funds. Here’s what you need to know.

What was SVB?

SVB was the 16th largest bank in the U.S. It was particularly popular amongst start-ups and was primarily based near San Francisco. In recent years, the bank has been particularly focused on recruiting Australian and NZ-based start-ups looking to expand to the U.S. Known Australian customers of SVB include Canva, Crimson Education and Mr Yum.

Remind me: how does a bank fail?

Banks don’t lock your money in a room when you give it to them. They invest it in bonds, stocks, or loans to make a return, which can be profitable for them. However, this means banks can’t pay all their customers back at once because most of it is tied up in investments. In most cases, this isn’t a problem, but if the bank is hit by bad news – say, it makes a string of bad investments – a “bank run” can occur where customers panic and scramble to get their money out. Banks “fail” in this position if they aren’t in a position to pay everyone back.

What went wrong at SVB?

In SVB’s case, the trouble began when they took on too many long-term bonds that lost value when interest rates began to rise, and it couldn’t keep up with the withdrawal demands of its start-up customer base. Last week, SVB announced a last-minute capital raise on the back of worse-than-expected results, which caused some customers to panic. On Wednesday (local time), SVB had to sell some of their bonds to keep up with withdrawal requests. As word travelled of the bank’s troubles, more founders tried to transfer or withdraw their bank balances – meaning SVB had to sell more bonds for more losses. In total, SVB customers withdrew $US42 billion on Thursday alone. A “bank run” had started. On Friday (local time), SVB officially “failed” and was taken over by government regulators. Customers were no longer able to withdraw any funds.

What happens then?

When U.S. banks fail, a government regulator takes over. The regulator will examine the bank’s financial situation before deciding how to proceed. One option is the bank can be sold, and the money owing to customers becomes the responsibility of the new owner. Another option is for the bank to shut down, and the government to take over the process of selling off its assets and returning as much money as possible to account holders. In the case of SVB, this latter option is what happened. On Sunday evening (local time), U.S. regulators announced they would guarantee all funds held in SVB accounts to “ensure that the U.S. banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth”. It is hoped this move reinstates confidence in the wider banking system, preventing further failures.

What will this mean?

The fallout from SVB’s collapse depends on how much it spills over into other financial institutions (how “contagious” the collapse is). Contagion can happen because of financial overlap – say, if investments that fail due to SVB’s collapse also damage another bank with the same investment. It can also happen in “psychological” ways

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