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As the collapse of Silicon Valley Bank becomes one of the biggest banking failures in U.S. history, tensions are rising throughout the banking sector… but is it warranted? Why SVB collapsed and what’s next are two very important questions to ask so we can understand the what’s happening throughout the financial world.
What Happened with Silicon Valley Bank
Banks don’t fail often, and if they do it’s usually because of loan defaults (aka credit risk). With SVB however, there were a couple things that went wrong…
First, it’s important to know the basics of how banks work- when you deposit your money it doesn’t just sit somewhere untouched but instead the banks move it around (buy, sell, trade, invest, etc.). They already know that unless everyone comes in at the same time to withdraw all their money (also known as a bank run), you will be able to have access to your funds.
So as SVB rapidly grew into a tech investor haven over the last 40 years (important because the tech sector as a whole has been down recently), it made a choice to buy government bonds. These bonds are usually safe, long-term investments but as we deal with inflation and rising interest rates those investments became less valuable- which means SVB had read the market wrong, and they started running out of money. Word spread that SVB was selling their investments at a loss, people panicked, and customers began pulling their money out (tens of billions of dollars within hours). A day after the panic ensued, the bank collapsed. Fortunately, the Fed stepped in and guaranteed people would be able to get their money back beyond the FDIC 250k insured limit.
What’s Next
Because interest rates are expected to continue to hike, and we feel the ripples of SVB’s collapse across the entire financial industry, the question is will this happen again? The short answer is most banks don’t have a liquidity crunch like SVB did, meaning the long-term banking industry is expected to be healthy. However, the customer uneasiness is still there so bank runs on smaller or regional banks are a concern for investors. And while we don’t know the full results of these rapid rate increases, bank analysts and government officials continue to reiterate that the banking system is safe and there is funding available…
Even though we can’t predict the future of the banks for sure, we can promise safe and secure payment processing options- contact us here at Align eCommerce to find out how!
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