Banking bust

The Federal Reserve, a familiar sight for the area, is one of the greatest forces in the United States economy.

Photo courtesy of Flickr under Creative Commons License

The Federal Reserve, a familiar sight for the area, is one of the greatest forces in the United States economy.

The Silicon Valley Bank (SVB) and Signature Bank collapses mark the greatest bank failures since 2008. Billions of dollars were lost. The ripple effect has affected banks across the world and frightened many as to the future of their finances.
“It’s a complicated situation, but it stems from bank mismanagement. They failed to diversify their investments and invested a lot in government bonds. To help combat inflation, the [Federal Reserve] raised interest rates. This means that the SVB’s government bonds were worth less than they bought them for, which lost them money,” relayed Economics and Finance teacher Craig Brown.

A government bond is essentially the government borrowing your money and promising to pay it back later at a higher rate. When the Federal Reserve raises rates, the bonds become less valuable.

In addition to the failing bonds, the SVB also specializes in tech startups and companies. Tech startups are inherently risky and that is a part of the SVB’s identity but also its failure. In the event of a tech start up failing, the bank cannot recuperate its lost investments and loans.

“Between losing money on bonds and general mismanagement of investments, the bank lost too much money. When the bank couldn’t pay its depositors back their money, people panicked and created a run on the bank,” said Brown.

Banks do not hold all their depositors’ money on hand, though banks of this size are mandated to keep at least 10% of their deposit in reserve. With this 10% stored, the bank is free to invest and loan the remaining 90%. When the SVB’s depositors panicked and rushed to withdraw their money, it caused the bank to lose all available cash. With no money to pay off debts, the government must step in.

“The [Federal Deposit Insurance Corporation] (FDIC) and other regulators stepped in and looked at accounts, backed them up to $250,000. This can have a trickle down effect to banks below the SVB, as well as above,” said Brown. “In short, it was a convergence of a lot of factors that led to this firestorm.”

In spite of the bank’s collapse and the worry that plagues those who remember the hardships of the previous financial crisis, the crisis is unlikely to escalate to those terrible heights.

“In the grand scheme of things, it’s relevant, but it won’t lead to the demise of the American economy. The big takeaway is that the government program designed for this is protecting depositors and that says a lot about its strength. The system is more resilient than 2008,” reflected Brown.

In a world with economic events far too complex for the layperson to understand in their entirety, it is important to construct an educated opinion before taking any action that may impact your financial wellbeing.

“Social media played a big role in the early freakouts, on legitimate news sites you get a larger view that despite possible biases, can allow you an informed opinion. Take a step back and evaluate the situation. In this case, is it bad? Yes, but it happens. As interest rates rise to combat inflation, there are bound to be some victims,” said Brown.

A key concept in not only financial understanding, but the understanding of the world is history. It illustrates the mistakes of the past so that one can meet modern problems with more understanding and preparedness.

“You need to understand the past to understand the present,” stated Brown.

Though nobody is expected to fully understand the economy, Brown provides students with information to help them make better financial decisions. The financial concepts are the base of a successful life.

“It is better to screw up with the fake money. That when you have the real money, you make the right decision. Economics and Finance is one of the most important classes because everything you learn can help you throughout your life, ” summarized Brown.

An economic misadventure like these bank collapses can sow seeds of doubt and fear in the people, but it is key to stay informed and financially literate to find your way in this complicated landscape.