Here’s a Simple Breakdown of The Silicon Valley Bank Crash

Most people really don’t know how a Bank works and this proves it.

Banks have been a cornerstone of the financial system for centuries, providing essential services such as lending and depositing. However, with the changing economic climate, we have seen an increase in banks closing their doors permanently. In this blog, we will explore the various factors that have led to this phenomenon.

Special thanks to the Boujie Banker for curating these thoughts.

How the Global Economy and How A Bank Crashes

The economy has been running hot since 2017, with money being loose and people spending more.

This period of economic expansion led to increased lending and borrowing, which put pressure on banks to meet the demand for loans. While this may have initially led to growth and profit for banks, it also left them vulnerable to sudden changes in the economic climate.

Bear Market and how it affects your local bank

The US economy was overdue for a bear market, but it never came. Instead, we saw a prolonged period of economic expansion, which led to complacency among investors and banks alike. As a result, many institutions were caught off guard when the pandemic hit and the market crashed.

Taxation changes under Trump led to more loose money, which further fueled spending and borrowing. While this may have stimulated economic growth in the short term, it also left banks vulnerable to sudden changes in the market.

When the pandemic hit, the market tanked, and many Boomers who were retiring suddenly found themselves with less money than they anticipated. This led to a significant decrease in demand for lending, which put pressure on banks to maintain their profitability.

Adding a financial tanker filled with printed money gas to a burning building!

In response to the pandemic, the government stepped in to provide support and relief, pumping even more money into the market.

This superheated the market, causing more retail investors to jump on board, further increasing the pressure on banks to maintain their profitability.

As of March 2021, COVID costs totaled $5.2 trillion. All-in money printing totaled $13 trillion: $5.2 for COVID + $4.5 for quantitative easing + $3 for infrastructure.

This mountain of cash caused the current inflationary market. Too many dollars chasing too few goods.

The supply chain issues, Ukraine, oil, and the market shift to the cocaine bear cycle only added to the pressures on banks and made it difficult for them to maintain their profitability.

The federal reserve recognized the overheating of the market and stepped in to raise rates to slow down spending. This further decreased demand for lending and put pressure on banks to maintain their profitability.

The long effort to cool off the economy

Despite the federal reserve’s efforts, the average American continued to revenge spend their way back to post-pandemic normal, leading to a significant increase in spending.

Inflation began to ramp up, and people started to spend more by reducing their savings and increasing their credit debt. This put even more pressure on banks to maintain their profitability.

As a result, the federal reserve kept raising rates, making it difficult for banks to keep up with bonds north of 4.5%, while bank savings were at 0.01%.

Retail investors and traders saw the writing on the wall and began to pull their money, causing a bank run.

SVG couldn’t cover its bets, and they tanked, forcing the government to step in with the old FDIC insurance. At this rate, how much should you save at your local bank?

Bank Failures and the Issues with Modern Banking

Finally, with rates continuing to rise and people spending more than they have, it was only a matter of time before rates reached a point where people broke, leading to banks closing their doors permanently.

In conclusion, the banks’ failures were a result of a complex interplay of economic factors, including loose money, taxation changes, the pandemic, inflation, and increasing interest rates.

While the government’s efforts to support the market may have provided temporary relief, they ultimately could not prevent the economic pressures that led to banks closing their doors.

As we look to the future, it is essential to learn from these experiences and work to create a more resilient financial system that can withstand the challenges of the ever-changing economic climate.

The US government moved to quickly reassure the public. The government announced that the FDIC’s Deposit Insurance Fund will be used to make every SVB depositor whole. By the following Monday, President Biden gave a speech at 9 AM, asserting that “the banking system is safe.”

Time will tell if it’s enough.

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