Bank collapses are a problem for our future


AP Photo/Steven Senne

A passer-by walks away from a Silicon Valley Bank branch location, in Wellesley, Mass., Monday, March 27, 2023. North Carolina-based First Citizens is to buy Silicon Valley Bank, the tech industry-focused financial institution that collapsed earlier this month. (AP Photo/Steven Senne)

By Nick Glover, Lifestyle Editor

When Silicon Valley Bank collapsed March 10, flashbacks to 2008 were the first thing that came to my mind — the words “too big to fail” started echoing around my head. The second biggest bank collapse in American history, only behind the one in 2008, is an easy way to set off alarm bells for the general public. 

While the future of banking may look bleak, you don’t need to worry about your money. 

Banks are necessary if the public wants to maintain its current method of interacting with the market. Switching to using exclusively cash is wildly inefficient and is slowly going the way of the fax machine: a useful technology of its time, but something we tend to mock now. Stores like Amazon Go are proceeding with an idea for a cashless future, and while I think it’s silly to not accept cash, it seems to be where we are headed. 

Additionally, banks are a necessary way to fight against inflation. 

When banks hold your money, they aren’t just holding it in a vault for whenever you want to get it out; they are investing it and trying to find ways to play the market so that they can increase their profits. Remember, banks are businesses too, so they have to seek a profit. 

The good thing about this investment is that, depending on your account and who your bank is, you can get a small amount of this money back. If you’ve ever received interest in a savings account, you’ve benefited from this process.

The problem with banks – and with Silicon Valley Bank – is that investments are not a perfect science. If you combine bad investment decisions with really bad luck, along with some greed from executives, the perfect equation for failure comes about. 

Zooming in on Silicon Valley Bank, it’s pretty easy to see why they failed. In 2020 and 2021 when interest rates dropped, they still had to invest and try to make money, for their users and for themselves. 

SVB made the mistake of investing most of its money in low-interest government bonds. Basically, when the economy ticked back up as the pandemic started to open up, the U.S. government started offering up newer bonds, ones with higher interest rates. Because of this, the bonds with already low interest rates started to lose even more value. 

This information made it to the public, and those involved with the bank panicked. They started to close out their accounts and withdraw their money.

Normally, withdrawing money is fine, especially if people do it one at a time, but this wasn’t the case with SVB. 

Because banks are investing at all times, they aren’t holding the money that is needed if a mass withdrawal occurs: The bank only needs to have 10% of the money it’s holding as liquid assets. If more than 10% of the money being held needs to be withdrawn, the bank has to sell assets off in order to pay out the withdrawals. 

In the case of SVB, the bank had one asset they could sell off: the low-interest bonds. Because the other bonds on the market had a higher interest rate, the bonds that SVB held were worth less than the bank paid for them. To sell them now would be to sell them at a loss, but the bank had no choice; it had to pay out the withdrawals and to do so, the bank needed to sell the bonds.

After selling the bonds at a loss, the bank’s stock price plummeted. If you sell stocks for a $1.8 billion loss, your stock should probably drop. 

None of this influences the everyday consumer though. The Federal Deposit Insurance Corp.  insures bank accounts up to $250,000 so that if a bank fails, every account can be paid out.

For businesses, it’s a different story. Businesses’ accounts are not insured by the FDIC and so if the bank fails, the business has to hope that the government will swoop in and save the day. In this case, that happened. In an emergency session, Congress decided to insure the bank,  making it possible for the bank to completely pay out whatever is necessary, a choice keeping many businesses afloat. 

In this case, the story has a happy ending for most — SVB and its employees are out of luck, even those who didn’t influence decisions like janitors or tellers, are the ones who will be most harmed from this failure. The consumers are insured and Congress saved the day making sure businesses wouldn’t fail.

But this won’t always be the case. SVB sets an example for other banks that reckless spending and poor investments will be saved. Essentially, because of their importance, banks are now off the hook for any poor decision. 

SVB was in the place to be forced to sell because of astronomical payouts it made to executives and higher-ups in the previous years; the bank would still have some liquid capital if they didn’t splurge on giving the corner-office big-shots money that they didn’t deserve. 

Because SVB was saved, other banks are going to follow suit. They see that they can get away with giving themselves tons of money, even if it isn’t safe, smart or good for the consumers. The banks may be too big to fail, but the bonuses they are giving out are too big to not lead to failure. 

Though we may get saved each time this happens, and believe me, it will happen again, we are also the ones who are losing here. Congress may not be able to save the day next time or the time after. Maybe, they will have to raise our taxes to pay off these mistakes the next time it happens. But however it plays out, we will be the ones paying for it, not the ones who actually caused it. 

You don’t need to be scared for your money, but for the future of banking — and for the future of the economy — the outlook seems bleak.