📈Bank Run
Happy St. Patrick’s Day. Ian’s up this week to talk about what a bank run is in the context of Silicon Valley Bank (and others) going under.
I write this as I go through one of the craziest trading weeks of my career (which is over a decade now, shit I’m getting old). Below is actual footage of me hiding under my trading desk.
This insanity has been caused by the collapse of Silicon Valley Bank (SVB) on Friday of last week. While the government stepped in to backstop the deposits at the bank, it was still shut down and caused a ripple effect through the banking world.
On Sunday Signature Bank also failed, and this week the market has hunted out weak banks punishing the stock of companies with similar profiles to SVB.
The drama continued to unfold as the week wore on with Credit Suisse a global investment bank with nearly 3x the assets of SVB coming under fire and requiring help from the Swiss National Bank to shore up their balance sheet.
Now, our astute reader may be saying something along the lines of “Hey dipshit didn’t you just tell us to open a BANK account last week?”
Why yes, yes I did. And the reason that advice remains strong despite the opening to this week's blog is threefold.
Bank failures happen as a natural part of the business cycle, and these were the first failures of any kind since 2020
There are over $19 trillion with a T in bank deposits in the US, so SVB failure of $200B (most of which will be recovered) is ~1% of overall bank deposits
This last point is most important in the short term for anyone reading this. Most likely you will have less than $250k in your checking or savings account with your bank and therefore shouldn’t worry for a second about your bank failing and you losing your money.
But people with larger balances than $250k, usually businesses, do have to worry about losing their money and that is exactly what happened with SVB. We witnessed a modern-day version of something called a bank run.
Many of you may have heard about this or seen it explained in the movie It’s a Wonderful Life. And if you have a couple of minutes to spare I would recommend watching the following clip which explains more poetically than I can what a bank run is.
If you didn’t watch, a bank run is what happens when everyone tries to take their money out all at once and the bank cannot meet customer demand and is forced to close.
While it may seem like a bank should have all the cash on hand to pay you (it says the money is there on my app!) the fact is a bank doesn’t simply keep all your money in a big vault. They use the money you deposit to lend to other bank members for things like cars and houses.
“The money's not here. Your money's in Joe's house.”
This depositing and lending is a bedrock of the modern financial system and what helps drive the economy. If you are uncomfortable with the idea of a bank not actually having all your money, think about trying to buy a house all cash!
With prices how they are it’s hard enough to come up with a 10% downpayment let alone paying cash, upfront. So these deposits and loans allow us to save and lend money, safely.
This brings us back to SVB and how that all went so poorly. Because it was a business (tech specifically) driven bank, 93% of its deposits were over the $250k guaranteed limit and therefore uninsured.
So unlike you or I, these companies had incentives to try and get their money out once they heard the bank was in trouble, which is what happened last week. Prominent VCs with money in or associated with the bank urged clients to pull their money which sparked the bank run. And while SVB had plenty of assets (like houses, and business loans) that are not readily available, the bank was forced to close.
What’s the Upside?
Bank runs can still happen and while they are dominating headlines currently they are relatively rare and part of business cycles. And while they sound scary and cause issues in the financial system you can rest easy that your money (up to $250k per bank account) is 100% insured and protected. So instead of running to the bank, run to your nearest bar and watch March Madness.
Know someone freaking out about this week’s headlines? Share this post.
For Your Weekend
Watch:
The Young Offenders ($1 Netflix)
Two Irish teens set off across Ireland to stake their claim on the bales of cocaine that washed up in Cork after a drug ship capsized. Its pretty damn funny (especially if you like Irish humor) though the accents can be a bit impenetrable for American ears. Despite a wobbly third act, the movie is a heartfelt ode to friendship that still manages to get a lot of laughs.
The Banshees of Inisherin ($ Prime, other streaming platforms)
Friendship seen through a darker lens. Where The Young Offenders is about two friends going through a trial and coming out closer, The Banshees of Inisherin is about one friend cutting the other out of his life (literally) for the sin of being boring. It’s darkly funny in a gallows humor kind of way, so don’t expect any LOLs. If you liked In Bruges, Seven Psychopaths, and Three Billboards Outside of Ebbing, MO, you’ll probably be up for this one. If you haven’t seen any of those, go watch In Bruges. If you liked that, you’ll probably be up for this.
Chuckle:
“Not only am I saving money by dying beer green myself, but I can pass out face first in a toilet I’m familiar with and not pay for anything I break. I feel like I’ve turned a corner.”
$ = you may need a subscription to watch or read. Debated even adding this for Netflix. It’s basically a utility at this point, right?