It's been a rocky few days for banks since the now-defunctional Silicon Valley Bank disclosed that it had suffered a $1.8 billion after-tax loss and that it urgently needed to raise more capital to assuage depositors' fears. SVB's chances of obtaining further funding were bleak. Following repeated attempts to sell the bank to healthier banks, the Federal Deposit Insurance Corporation took possession. Customers with deposits of up to $250,000 per account at SVB, the nation's 16th-largest bank, will have access to their funds according to the FDIC. Yet, it was unclear at the time what would happen to deposits in excess of $250,000, the amount insured by the FDIC in the case of a bank failure.
The Federal Reserve, the Treasury Department, and the FDIC all said that the failures of SVB and Signature Bank were a big enough threat to the whole banking system that regulators should take the unusual step of guaranteeing the larger deposits.
Customers in Silicon Valley, who were mostly startups and other tech-focused businesses, started to need cash more over the past year. Because of this, they had to take money out of their accounts. In the meantime, SVB had to keep selling its assets, mostly bonds, at a loss so that customers could get their money out. But the bank's losses got so big that customers started to worry that SVB wouldn't be able to make sure every customer could get their money. That led to a huge rush on the banks, which made the FDIC step in.
In other words, Money in banks is FDIC insured, which means it is backed by the US government, but only up to about 250,000. A lot of these big companies, like banks, private equity companies, venture capital companies, all these have money stored in Silicon Valley Bank, and when they can't get those reserves out, they can't operate their businesses. Why? Because they can't find pay. Even if the FDIC works for them, it takes a long time to see your money. What happened in the residences had a greater impact on the economy. Silicon Valley Bank was over leveraged, but banks normally use bonds and other secure investments to take your cash in the positive, then go reinvest that money so that they make money.
Even if the FDIC works for them, it takes a long time to see your money. So, what happened in the residences had a greater impact on the economy. Basically, Silicon Valley Bank was over leveraged, but banks normally use bonds and other secure investments to take your cash in the positive, then go reinvest that money so that they make money.
That's how banks make money. They're giving you that money by lending it out and having assets in bonds and receiving greater interest rates. Bond values fall as interest rates rise due to inflation. As interest rates rise, bond values fall. Consequently all the bonds they had on their books lost value, and they were obliged to sell at a loss to fulfill cash demands. Then there's this ripple effect where people are concerned about their money in SVB bank, and it generates what's called a run on the bank, which is what we saw, and eventually powers have to step in and shut the bank down.
You'll be impacted whether you have money in Silicon Valley Bank or not; obviously, folks who have money in Silicon Valley Bank are not in the best position. But that's part of the problem. Even if you didn't have funds deposited with SVB, the bank's failure—the second-largest on record and the first since 2020—affects the entire U.S. financial system. When customers saw that SVB was in trouble and rushed to branches and crashed the bank's website, many started to wonder if their money was safe where it was deposited.
All the panic went right to Signature Bank. Signature Bank, a big lender in the crypto industry that was based in New York, was told to close over the weekend. The bank was one of only a small number of places where people could put crypto assets. When FTX went down last year and crypto prices dropped, it wasn't a good sign for the bank. Barney Frank, a former congressman who helped make new rules for the financial industry after the 2008 financial crisis and a member of SVB's Signature Board, blamed SVB for its failure in the end.
He told The Wall Street Journal that SVB had caused the panic. "Friday was going well until the last few hours.” It's a ripple effect, as you can see. Customers are anxious about their money in SVB bank, which causes what is known as a run on the bank, which is what we witnessed, and eventually powers must intervene and shut the bank down. I believe this is the first of many, given that interest rates are growing at the fastest rate in US history. We've already discussed the negative repercussions of inflation. This is the negative impact of inflation: raising interest rates to combat inflation will cause something to break.
Read more: Is Inflation Improving? The Numbers Are In…
The Federal Reserve has increased interest rates rapidly even while U.S. inflation is still at multi-decade highs. In fact, rates have increased by over two percentage points in only the last six months. In this image, which was motivated by a chart from Chartr, we contrast the rate and intensity of the recent interest rate increases with those of earlier monetary tightening episodes over the last 35 years
What you can do is start investing in alternative asset classes like Farmland and Bitcoin, and keep as little cash in the bank as possible, because it will be preceded by inflation or go out of business. Here are 3 Important Financial Decisions to Make On Payday.
Read more: 5 Reasons You Should Invest In BITCOIN Today
To recap, there are a number of economic trends to be aware of. This, I believe, is the first in a series of domino reactions that could have far-reaching ramifications for the economy as a whole. Make certain that you are doing all possible to protect your assets.
As Managing Partner of Vincere Wealth, Josh assists clients in navigating financial challenges and making sound financial decisions. Having someone guide you in making sensible financial decisions today can have a substantial impact on your future financial wellbeing. Josh takes great pride in guiding customers through the complexities of taxes, real estate, businesses, employer stock and international financial planning.
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