The Daily Yonder's coverage of rural economic issues, including workforce development and the future of work in rural America, is supported in part by Microsoft.
The Banking Collapse, Explained
Happy second day of spring, Keep It Rural-ites! The tulips are officially poking their heads out from the soil here in the Pacific Northwest, which is a telltale sign of warmer days to come. (Although I had to wear a down jacket and gloves yesterday when I ventured outside, so I may need to curb my enthusiasm juuuust a bit…)
Banking has been on my mind ever since Silicon Valley Bank collapsed on Friday, March 10, followed two days later by Signature Bank, a smaller New York-based bank. Silicon Valley Bank was the biggest U.S. lender to fail since the global financial crisis in 2008 and it has some people understandably nervous that we could be entering another recession, which hit rural America especially hard.
Plenty of misinformation has been swirling around regarding the events of the past week and a half. Let’s clear up some questions, shall we?
First Things First: Banking Basics
Simply put, banks are privately-owned, for-profit institutions that operate as a place for people to deposit their money (to learn about the potential of publicly-owned banks, read this Daily Yonder interview).
Banks use the money deposited to offer loans to people for purchases like houses, cars, and businesses. They also offer larger loans to corporations for real estate, machinery, and other big expenses.
These loans accumulate interest, which is one way a bank makes a profit. Banks also make a profit by investing in stocks and bonds in other companies.
What Caused the Collapse?
Banks collapse when they don’t have enough money to pay their depositors or pay the money they owe in loans and other debts.
For Silicon Valley Bank, the problems began when the Federal Reserve decided to increase interest rates, starting last year, in order to fight inflation. The bank’s biggest depositors were tech companies like Roku, the streaming media player company, and Roblox, an online gaming company.
Over the past year, the tech industry has seen a significant decrease in value. Tech companies that deposited in Silicon Valley Bank have been under more pressure as their values decreased, which meant that they started withdrawing more money from the bank than they used to.
To have the cash on hand to meet these withdrawals, the bank sold a $21 billion bond portfolio on Wednesday, March 8. The bank sold this portfolio at a loss of $1.8 billion. On Thursday, Silicon Valley Bank announced it would sell $2.25 billion in stock, a move that alerted depositors to trouble in the bank’s finances. Some large depositors were advised to pull their money from the bank, and investors who had been lined-up to purchase the $2.25 billion in stock withdrew from the sale, triggering the bank’s collapse.
The Aftermath of a Banking Collapse
When the demise of Silicon Valley Bank became clear, the Federal Deposit Insurance Corporation – better recognized by its initials, FDIC – shut down the bank and made a new one through which all of Silicon Valley Bank’s remaining money was funneled. The FDIC did this to ensure that depositors got their money back.
This last point has been the cause of a ton of misinformation, mainly proliferated on social media: no, the FDIC did not “bail out” the failed bank. The agency used the bank’s own money to pay depositors, not taxpayer money as some claimed.
These dramatic events have brought to light the instability of the country’s banking system. The FDIC could institute tighter regulations and higher fees on banks, which could disproportionately affect smaller banks that serve more rural communities.
“Obviously, more regulation is costly, and these smaller banks aren’t going to have access to the same resources as the bigger banks,” said Fiona Cincotta, a financial market analyst, in an interview with Vox.
It will likely take a few months to know what changes the banking system will face as regulators decide the best way to move forward to avoid another banking collapse. The fate of small banks could be up in the air as they deliberate.
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