Why Banks Are Collapsing (DO THIS ASAP)

Bank Regulators have seen Silicon Valley Bank in the largest bank failure since the Great Recession. Customers were rushing to take their money out. There are recent developments that concern a few Banks.

"What's up guys, it's Graham here, and in the last 24 hours we have just witnessed one of the largest U.S. bank failures ever in history. However, what makes this so much worse is that even though it might seem like an isolated event, once you begin digging deeper, you'll begin to realize that this is a huge blind spot for the entire banking industry, with the saying 'too big to fail' possibly being tested again soon. So let's talk objectively about exactly what's happening, if your money is safe, how the entire banking system could be vulnerable if people begin to withdraw their money all at the exact same time, and then finally what you could do about this to make sure you're best protected. Although before we start, as usual, if you appreciate the information, it does help out tremendously if you subscribe, and if you want to be kept up to date on topics just like this before I'm able to make a full video on them, I do have a newsletter down below in the description. It's totally free; it costs you nothing. It's just the information. So thank you guys so much, and now that said, let's begin."

Alright, so to start we gotta talk about Silicon Valley Bank. This was a company founded in 1982, and they quickly became a prominent lender throughout Silicon Valley while catering almost exclusively to venture capital. Essentially, this became the startups' Bank, where CEOs and businesses would go for funding. For the last several decades, that worked out incredibly well until recently. You're going to want to follow along in 2020 when interest rates were reduced to zero and stimulus measures were put in place. Both Banks and people were flush with cash, and almost all of that funneled back into the banking system, which is where things began to go wrong.

See, Banks currently operate on what's called fractional Reserve banking. This means that banks are required to keep at least 10 percent of their customers' money available at all times for withdrawals. Just imagine it like this: you give me your thousand dollars to hold on to for safekeeping, but I could turn around to give 900 of that to somebody else who could give 810 to somebody else who could give 729 dollars to somebody else. Under this situation, Banks hope that enough people give them 1000 dollar deposits so that when the first person wants their money back, they'll have enough cash on hand to process that withdrawal.

The benefit to doing this is that this allows their customers access to a much larger pool of money, and they're able to earn interest on their deposits. But that also relies on everyone having faith that the system works and not all pulling their money out at the exact same time, which has started to happen.

Now, to be fair, in most cases, Banks aren't lending to other Banks who lend to other Banks who lend to other Banks. Instead, Banks often take your money, loan out a portion of it, and invest the rest in really, really safe and stable investments like U.S. treasuries. This ensures that as long as those treasuries are held to maturity, the bank gets near the guaranteed rate of return, customers could be made whole, and everyone wins, except in this case.

And here’s why: in 2021 and early 2022, Silicon Valley Bank took roughly a hundred billion dollars and invested that into government-backed bonds, with a significant portion of that locked away for three to four years at an interest rate of just 1.79 percent. Essentially, this meant that Silicon Valley Bank took a massive bet that the Federal Reserve was not going to raise interest rates as fast as they did. And when they turned out to be wrong, that put them in a very dangerous position.

See, bonds like this are valued based on their yield, and in this case, Silicon Valley Bank was on the wrong side of the transaction to lose a lot of money. Just imagine it like this: as an example, Silicon Valley Bank took a hundred dollars and bought a two percent interest rate for four years. As long as they could hold it for the full four years, they'll receive a hundred and eight dollars and 24 cents back and be paid in full—no problem whatsoever.

But what would happen if interest rates suddenly increased right after you made your investment, and all of a sudden you could buy that exact same hundred at a seven percent return and make 131 dollars over this exact same four years? Well, in that case, sure, that hundred dollar two percent bond would have to decline to 77 to be worth what you could buy at today's prices. And if you can't afford to hold out for the full four years to get your money back, you're going to be forced to take a loss. And that's what's starting to happen.

Normally, Banks would have enough Capital coming in from a variety of sources to cover customer withdrawals, but in this case, Silicon Valley Bank's customer base was mainly technology companies, which have seen significantly less funding. That means that their companies are forced to take more money out of the bank to pay for their own expenses. Essentially, Silicon Valley Bank severely misjudged the size and pace of the Federal Reserve's rate hikes while assuming that the Venture Capital Market would continue to stay strong. That left them in a situation where they locked too much of their money away in one specific asset that yielded too low of a return, and that occurred at the exact same time their customers began withdrawing more money than they anticipated.

This, of course, is where the dominoes begin to fall. On Wednesday, March 8th, the company announced that they would be selling off a third of their ownership in an effort to raise 2.25 billion dollars. This was done in response to them being forced to take a 1.5 billion dollar loss on a portion of their bond position, which was done to bring enough money back to the bank to be able to continue processing withdrawals. The problem, however, came on March 9th when word got out that the company could potentially be facing insolvency issues, and as a result, their stock price plummeted more than 60 percent, making it unlikely that the company would be able to raise additional capital to help plug the losses.

At that point, the entire situation devolved into a full-scale panic. It was reported that their CEO had been calling clients to assure them that their money with the bank is safe, while startup Founders had been advised to pull their money out as soon as possible just in case. But overnight, things got even worse. On the morning of March 10th, Silicon Valley Bank announced that they had failed to raise capital and instead were looking for a buyer, meaning they quite literally ran out of money, had more withdrawals than they had cash on hand, and were looking for anyone who could potentially take them over.

Unfortunately, though, that seems like too little too late because just a few hours after that, Silicon Valley Bank was shut down and closed by Regulators, with the message that all of the bank's deposits had been transferred to the new Bank. Of course, you might be thinking to yourself, 'FDIC Insurance exists for a reason, and they should be able to recover up to 250 thousand dollars almost immediately.' Except, uh, yeah, that's another problem. Here's the thing: as most of you know, anytime you make a deposit within a bank, you're protected by what's called FDIC insurance, which protects up to the first 250 thousand dollars you have deposited in the event of a bank failure. This was created after the bank runs of the 1920s Great Depression as a way to incentivize people to re-trust the banking system, and it largely worked.

Since then, FDIC insurance has continued to evolve for any Bank that wants to legally operate in the United States. The good news is that it's a fairly efficient system. In fact, their website says that you could get access to your money within a few days after the bank's closing. However, in this case, the bad news is that, as Genevieve from Grit Capital points out, only 2.7 percent of Silicon Valley's Bank deposits are less than 250 thousand dollars, meaning 97.3 percent of their money is not FDIC insured, and it's not clear exactly what's going to happen to all of that money now.

Typically, in cases where deposits exceed the FDIC limit, losses are recovered in a bankruptcy court when assets are sold off to pay their creditors. But as Bankrate explains, that process could take several years to complete, and more than likely, their customers are not going to receive all of their money back from what they started with. Although, to me, that isn't even the worst of it. Instead, it's just how far this is about to reach over the coming few days and weeks, and I have a feeling this is really only the tip of the iceberg for those unaware.

Silicon Valley Bank isn't just a bank for the average person; they're the bank for a significant portion of venture-backed companies throughout the United States. When those businesses keep a significant portion or even all of their money with one institution, they could be completely wiped out overnight. The reality is many of these institutions have raised millions or even tens of millions of dollars with the expectation that that's going to be enough to last them throughout these next few years. Those businesses have carefully saved money, kept it liquid for emergencies, and have spent it wisely, only to have it reduced to 250 thousand overnight.

From that perspective, this is going to be crippling to every single business that banks with Silicon Valley Bank, especially since they currently hold more than 342 billion dollars worth of customer funds. Now realistically, a startup is not going to lose all their money with the bank, and it's not like every dollar over 250 thousand is suddenly worth zero. But it could take years to recover whatever's left, and whether or not the company has enough money to stay afloat in the meantime is completely up in the air.

I would venture to say that most of them cannot. Just consider that everything from payroll, company expenditures, and all of their overheads could be held in one bank, and 250 thousand could be a drop in the bucket for a company that had saved significantly more to make it through a time of slower growth. There's really no way out of this, with the exception of trying to raise cash as desperately as possible in a panic at a discount, downsizing significantly, or going under, which is something that no one thought would happen just a week ago.

So that then, of course, begs the question: could the same thing happen to your bank? The answer is it's possible, but it's unlikely. The issue with Silicon Valley Bank was that they were in a niche market servicing startups and were funded by Venture Capital, which was drying up. That meant that very little money was flowing in and a lot of money was flowing out, and the majority of the bank's Capital was locked away in bonds for the next four years at a low interest rate that had declined in value.

Essentially, this meant that if the bank were to wait long enough, they would have enough cash on hand and potentially absorb the short-term losses. But when everyone begins withdrawing all of their money all at the exact same time, the bank is left with no other choice other than to shut down.

Now sure, in essence, every single Bank operates this way and is only required to keep 10 percent of customer funds on hand at all times to process withdrawals. But in Silicon Valley Bank's case, they went all in on the bond market at the worst possible time, at the very peak, while their customers were moving money out of the bank during a time where they needed capital and wanted a higher return. It was really a perfect storm.

For most other Banks, though, the Fed's Vice Chair recently said that there are obviously larger institutions that are also exposed to these risks too, but the exposure tends to be a very small part of their balance sheet. So even if they experience the same deposit outflows, they're more insulated. That's why I think in order to best protect yourself, you should never keep more than what's insured from the FDIC, which is typically 250 thousand dollars for an individual bank, or stick with one of the larger institutions who's more likely diversified and more likely to be okay.

For almost all of you watching, I would venture to say that it's probably not going to make any difference whatsoever because most people don't keep more than 250 thousand dollars in cash in any given bank. But in the big picture, it's a very good example that you should never keep all of your eggs in one basket. You should always have multiple accounts in good standing with other Banks, just as something to fall back on.

At the end of the day, sometimes things could happen that are completely outside of your control, even if you do everything right. As far as what happens next, is really anybody's guess. It's still unclear if it's possible for another bank to swoop in and buy them up or if Silicon Valley Bank is deemed systemically too big to fail while the government steps in to prevent what could potentially be tens of thousands of employees losing their jobs and companies going under, or if they're going to be forced to go through bankruptcy, with 97 percent of their customers waiting to see what's going to happen.

Personally, I have very mixed feelings on this. First, I find it surprising that a bank would have the ability to lock away a substantial portion of their assets and essentially bet their customers' money on the decisions of the Federal Reserve. To me, no Bank should be legally allowed to take such a sizable risk, and there should be more regulation in place to make sure that deposits are properly diversified.

Second, the FDIC limit of 250 thousand makes absolutely no sense to me when 97 percent of their depositors were above that amount to begin with. I think the business accounts should have access to significantly higher limits since, after all, they have operational expenses, payroll, and overhead to meet—not just as an individual, but for an entire company that also supports tens or even thousands of employees.

In that case, it would make way more sense for the FDIC limit to be based on a percentage of what that person deposits. I mean, let's be real: a business is not operating a 10 million dollar bank account the same way an individual would, who's probably never going to see 250 thousand dollars cash in their lifetime. That's why I think it makes way more sense to base the FDIC limits on a percentage of what they have deposited or an average account balance just in case something happens, like what we just saw.

But again, all of this is likely too little too late, and the best that we could do right now is just to wait and see what happens. So with that said, you guys, thank you so much for watching. As always, feel free to add me on Instagram and don't forget you could grab a free stock down below in the description with our sponsor public.com, because that could be worth all the way up to a thousand dollars when you make a deposit with the code 'gram.' Enjoy, thank you so much, and until next time.