Someone who's good at the economy but not in a "we gotta kill homeless people to make the line go up" way, what's the deal with the silicon valley bank going bankrupt
So, Silicon Valley Bank is a bank that focused on serving business clients in the tech sector, both startups and the venture capital firms that funded them. Lotta money there, right? Right! Well, they spent all that money making more money , and not very much of it doing things like building infrastructure or making their services actually, like, good. Which is a problem.
The way banks work these days, when you hand them money they don't just put it in a room and lock it up. It's all electronic anyway, so there's no really much to lock up. Instead, they add numbers to your balance and take that money and use it for other things. IE you put $100 in your savings account, they write down "You have $100" and occasionally update it as your savings earns interest, then they take that same $100 and hand it to someone else as a loan. This does mean that they don't, technically speaking, have your $100 anymore. If you hit up an ATM and pull your $100 out, they'll hand you someone else's $100. That is normal and expected bank operation, and as long as they aren't idiots it isn't a problem.
Recently, some badly-timed business decisions on their part sparked a bank run. Bank runs are when depositors at a bank all freak out and try to pull their money out at the same time. If no one is putting money in and everyone is pulling money out, and they don't technically keep all that money on hand... well, that is a capital-P Problem. They can't hand you someone else's $100 if that person is also asking for their $100 and so is everyone else.
Now, we know this is a problem. This made a very big fucky-wucky about 90 years ago when the Great Depression happened. So in the wake of that clusterfuck, the government created the Federal Deposit Insurance Corporation, or FDIC. FDIC insures deposit accounts (checking, savings, CDs, etc) up to $250,000 per bank per person. Even in the event of a massive bank run and every single person pulling out every single dollar all at once, you will get your $250,000 back. Above that, it depends how much money the bank can scrounge up and how many people it has to make good to.
Now, the reason this continues to be a capital-P Problem for SVB is that thing I said right at the start.
Silicon Valley Bank is a bank that focused on serving business clients in the tech sector, both startups and the venture capital firms that funded them. Lotta money there, right?
$250,000 is a pretty hefty chunk of change for an individual human person. If you have that kind of money in cash, you're probably not keeping it all in a bank deposit account anyway, because it's earning 0.01% interest and therefore getting chewed down by inflation constantly. But a business may absolutely need to keep that kind of cash on hand, because that is the cash they're using for things like, oh. Paying employees.
So while we can point and laugh at Silicon Valley tech bros and the kind of cowboy startups that try to pay their employees in beer and worthless stock options losing money, this is also hitting a lot of ordinary people via their employers' sudden loss of payroll funds. Etsy, for instance, used SVB, and now their ability to pay all the folks selling their work on Etsy is, to use a highly technical term, super fucked up.
FDIC is doing their do, which means that depositors will be getting back their up-to-$250,000. This is, like all processes involving money, highly bureaucratic and slow-moving. It kind of has to be, because when there is a chance to be handed money, there are loads of people who will lie their asses off in order to get in on the action. So FDIC has to validate all the depositors and make sure their balance claims are genuine &etc before they can fling money around, and they're working on selling off everything SVB owned in order to make them make good on it as much as possible. But in the meantime, folks aren't getting paid and also it's making people in the business world look nervously at the rest of the financial sector, because banks are a pretty incestuous pile of daisy-chained handjobs. The last time there was a Big Bank Problem was the 2007-2008 crash, and the collapse of a couple big financial institutions took down a ton of big respected money names. So everyone is freaking out.
Your average bank takes deposits and makes money by loaning it out to other customers. But so many of SVB’s customers run on venture capital (basically a loan that gets handed out in a lump sum) that they didn’t need to borrow from SVB. They just needed somewhere to park their payroll and operating expenses. So SVB had to find another way to make money off of the deposits. Treasury bonds are safe and stable, and it would have worked (I’m told) if the bank run hadn’t happened.
many thanks to @elalmadelmar and @wrenb77 for this super excellent and deeply clear explanation.
am screenshotting this and keeping.
