What's a bank run and should we be concerned?
A bank is an organization that lends money and provides services to its customers.
Money is lent out using deposits as collateral, where the depositor is paid interest for the risk of deposit. Insurance organizations provide deposit guarantees — under a certain value and for specific accounts — that will be redeemable if the banking institution is unable to honour withdrawals.
A bank run occurs when a large number of customers of a bank or other financial institution withdraw their deposits simultaneously over concerns of the bank's solvency.
— Bank Run: Definition, How It Works, History, Examples and Effects, Investopedia
Why is this important to know?
Silicon Valley Bank (SVB) was established in 1983 and listed on the Nasdaq IPO as SIVB in 19881. The institution has numerous locations throughout the US, but primarily does business in California.
It provides the following services:
SVB wrote a memo to its employees Friday.
"We request all employees work from home today and until further notice, except essential and branch employees. More information will be communicated as soon as it is available."
— Banking regulators close SVB, move quickly to avert crisis, Reuters
Okay. So what?
Shares of SVB (SIVB) were halted Friday morning after falling more than 60% in premarket trading.
The stock tumbled 60% Thursday after the bank said it had to sell a portfolio of US Treasuries and $1.75 billion in shares at a loss to cover rapidly declining customer deposits — essentially facing a run on the bank.
— Silicon Valley Bank collapses after failing to raise capital, CNN
Banking regulators closed SVB Financial Group March 10th, 2023 putting the lender into receivership to the Federal Deposit Insurance Corporation (FDIC) who will dispose of SVB assets and protect depositors.
Should bank customers be concerned?
“This is night and day versus the global financial crisis from 15 years ago,” he told CNN’s Julia Chatterly on Friday.
Back then, he said, “banks were taking excessive risks, and people thought everything was fine. Now everyone’s concerned, but underneath the surface the banks are more resilient than they’ve been in a generation.”
— Silicon Valley Bank collapses after failing to raise capital, CNN
This is a bold faced lie in an attempt to calm banking customers.
What evidence is there that banks are more resilient?
The FDIC recognizes it is unable to provide complete insurance of bank deposits. It insures $9 trillion in deposits, but institutions collectively have $125 billion in assets.
There is not enough money to go around to cover liabilities.
The FDIC does not want you to know that!
The FDIC cannot insure everybody in a crisis when many people want to withdraw their money all at once.
He claimed that although institutions will soon be able to figure out the dire implications of what’s being discussed at the meeting, the general public should not, because that would lead to “unintended consequences.”
“People need to understand they can get bailed in, but you don’t want a huge run on the institutions. But there are going to be. And it could be an early warning signal to the FDIC and primary regulators when these things happen,” he said.
— FDIC Bankers Discuss ‘Bail-Ins’ To Deal With Impending Market Collapse, Need to Know News
Despite this relatively unknown discussion, the FDIC continues to promote the banking system in an attempt to restore confidence and control a systemic contagion.
All insured depositors will have full access to their insured deposits no later than Monday morning, March 13, 2023. The FDIC will pay uninsured depositors an advance dividend within the next week.
Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds. As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors.
If there is a larger scale bank run, then the FDIC cannot insure every deposit. Existing deposits may be bailed in to cover bank liabilities.
That is the elephant in the room.
(There’s a lot of different elephants these days...)
If you would like to learn more about the financial system and methods to protect yourself, please consider reviewing my previous article.
In the event of a systemic banking collapse, the Federal Reserve would likely fulfill its role as the “lender and buyer of last resort” and expand its balance sheet by possibly $5 trillion (or more) to bail out the banking system.
What would this mean to you?
A bailout is designed to prevent “too big to fail” institutions from collapsing. That’s a good thing right? It might seem nice and calm people down, but that is not how money works. Value has to come from somewhere. A massive bailout intervention would dramatically increase consumer price inflation.
If you think things are expensive now — just wait!
(It would not be visible immediately.)
Protect yourself and consider what would happen if access to your bank deposits disappeared over night. Plan and prepare appropriately.
Please leave a comment if you have more information you would like to share so others may benefit!
