What is a bank run, and how did Silicon Valley Bank fail?

Last week, Silicon Valley Bank failed, leaving customers in a tough spot as the government took over.
A Silicon Valley Bank sign is shown at the company's office in Santa Clara, Calif.
Posted at 5:07 PM, Mar 13, 2023

Last week, Silicon Valley Bank failed, leaving customers in a tough spot as the government took over.

So, what’s going on? A bank run is to blame.

“A bank run happens when there is news that a bank can’t meet its obligations, and usually it's the deposit obligations, which means that if they had taken a billion dollars' worth of deposits, it can't give you back the billion dollars because it’s invested in various things that are not making the money back to give it back to you,” said Emmanuel Daniel, a finance author and publisher in the banking industry.

That’s where the Federal Deposit Insurance Corporation, or FDIC, comes in.

“If you had deposits up to $250,000, you were insured by the FDIC, except that most of its customers, 98% of its customers, didn't have $250,000 but billions of dollars, hundreds of millions of dollars, so almost all of them are not going to be insured by the FDIC,” Daniel said about the case of Silicon Valley Bank.

“We’re starting to see the impact of the Fed's rate increases,” said Greg Mesack, the senior vice president of government affairs for the National Association of Federally-Insured Credit Unions, or NAFCU.

He said most financial institutions swelled with cash in 2020 and 2021, due to tons of deposits because of stimulus checks and people not spending their cash, so balances grew. Financial institutions then had to make the decision on what to do with it, whether it was liquid assets or investing it long term. 

“Banks like Silicon Valley Bank made a decision to invest it in long term 10 Year Treasuries, which was fine in a low-rate environment, but when rates started to increase, we saw the impact of that decision,” Mesack said.

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The government did, however, announce they will step in and secure the depositors.

“Americans can have confidence that the banking system is safe. Your deposits will be there when you need them,” President Joe Biden said in a press conference Monday.

Shortly after the fall of Silicon Valley Bank, regulars closed New York-based Signature Bank, citing systemic risk on Sunday. The bank is a crypto-focused bank.

Experts say this could mean a number of things for the future of banks.

“This story is going to continue repeating itself because there are many corporations that are overleveraged in dollar debt,” Daniel said.

Mesack has other conclusions.

“I would say it seems unlikely given what the Treasury has done, and the way that regulators are focusing more and more on ensuring liquidity is there for institutions and for depositors,” he said. “This was not a systemic-wide issue, this was an individual institution’s balance sheet management. There could be other institutions that made similar gambles.”

Mesack noted that credit unions are also facing these challenges, but they can choose to be less risky and not chase yields, giving them the option of being more conservative with money.

The American Bankers Association shared the following comment with Scripps News:

“We share President Biden's confidence in the nation’s banking system. Every American should know that their accounts are safe and their deposits are protected. Our industry will work with the administration, regulators and Congress to further bolster that trust." 

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