FYI logo

Why Banks Are Collapsing (DO THIS ASAP)

Banks Are Collapsing

By Alfredo MorenoPublished 12 months ago 4 min read
Like

Why Banks Are Collapsing

Bank regulators recently saw one of the largest bank failures in history, involving Silicon Valley Bank. Customers were rapidly withdrawing their money from the bank, leading to the biggest bank failure since the Great Recession.

Although some banks are worried about recent developments, this failure appears to be a significant blind spot for the entire banking industry. This occurrence raises concerns about the "too big to fail" mentality that may be tested again soon.

To begin, let's take a closer look at what has happened. Silicon Valley Bank was established in 1982 and quickly became a prominent lender throughout Silicon Valley, primarily catering to venture capital. For several decades, it became known as the go-to bank for CEOs and businesses seeking funding, and the bank performed exceptionally well.

However, things started to go wrong in 2020 when interest rates dropped to zero and stimulus measures were put in place, resulting in banks and individuals being flush with cash.

Almost all the cash funneled back into the banking system, which is where the problem began. Banks currently operate on a fractional reserve banking system, requiring banks to have at least 10% of their customers' money available at all times for withdrawals.

Think of it this way: you give a bank your thousand dollars to hold for safekeeping, but the bank can lend out 900 dollars to someone else, who can lend out 810 dollars to someone else, and so on. The banks rely on enough people depositing a thousand dollars so that when the first person wants their money back, the bank has enough cash on hand to process that withdrawal.

This method allows banks to give their customers access to a larger pool of money and earn interest on their deposits.

However, it depends on everyone having faith that the system works and not pulling their money out at the same time. Unfortunately, this is precisely what has begun to occur.

To be fair, banks generally invest in safe and stable investments such as US Treasuries rather than lending to other banks. Banks can take your money, lend out a portion of it, and invest the remainder in safe and stable investments such as US Treasuries. As long as those treasuries are held to maturity, the bank gets nearly the guaranteed rate of return, and customers can be made whole.

Silicon Valley Bank, however, took approximately one hundred billion dollars and invested it in government-backed bonds in 2021 and early 2022, with a significant portion locked away for three to four years at a 1.79% interest rate.

Essentially, the bank took a massive bet that the Federal Reserve would not raise interest rates as fast as they did, and this decision placed them in a precarious position. Bonds like this are valued based on their yield, and in this case, the bank was on the wrong side of the transaction.

To illustrate this point, consider the following example. Suppose Silicon Valley Bank purchased a $100 bond at a 2% interest rate for four years. As long as the bank held the bond for the full four years, it would receive $108.24 and be paid in full. However, if interest rates suddenly increased to 7% right after the investment was made, the bank would have to take a loss. The bond would have to decline to $77 to be worth what one could purchase at today's prices. If the bank cannot hold out for the full four years to get its money back, it would be forced to take a loss, which is precisely what has started to happen.

Normally, banks have enough capital from a variety of sources to cover customer withdrawals, but Silicon Valley Bank did not in this case. This bank failure raises concerns about the entire banking system's vulnerability if people start to withdraw their money all at the same time.

So, As a result of the bank's risky investments, customers started to withdraw their money, leading to a domino effect of panicked withdrawals. This was the largest bank failure since the Great Recession, and it exposed a significant vulnerability in the entire banking system. If enough people withdraw their money all at once, it could trigger a chain reaction that could potentially collapse the entire banking industry.

This event is a stark reminder that the saying "too big to fail" might be tested again soon. Even though Silicon Valley Bank is a relatively small bank, the ripple effect of its failure could have far-reaching consequences. If people lose faith in the banking system, it could trigger a run on the banks, and the entire financial system could come crashing down.

So what can you do to protect yourself? The first thing you can do is to make sure that your money is spread out across multiple banks. This way, if one bank fails, you won't lose all your money. You can also consider investing in other assets, such as gold or real estate, that are less vulnerable to economic turmoil.

In conclusion, the failure of Silicon Valley Bank is a wake-up call for the entire banking industry. It's a reminder that no bank is too big to fail and that we should all take steps to protect ourselves. By spreading our money across multiple banks and investing in other assets, we can mitigate the risks of a potential banking crisis.

Humanity
Like

About the Creator

Alfredo Moreno

Love writing about anything that comes in mind, just love to write.

Reader insights

Be the first to share your insights about this piece.

How does it work?

Add your insights

Comments

There are no comments for this story

Be the first to respond and start the conversation.

Sign in to comment

    Find us on social media

    Miscellaneous links

    • Explore
    • Contact
    • Privacy Policy
    • Terms of Use
    • Support

    © 2024 Creatd, Inc. All Rights Reserved.