What is a Bank Run?
A bank run occurs when a large number of depositors of a bank withdraw their deposits simultaneously, usually due to fears that the bank may become insolvent or be unable to meet its obligations to depositors. This can trigger a vicious cycle where the withdrawal of funds leads to further panic and more withdrawals, eventually leading to the bank's collapse. Bank runs can have severe consequences for the financial system as a whole, as they can cause a domino effect in which other banks and financial institutions are also affected.
Recently, the collapse of Silicon Valley Bank (recently trending as #SVBCollapse on social media platforms like twitter) sent shockwaves to investors and companies alike who had all or some of their funds in the system. At a total asset holding of $209 billion at the end of last year, this is also the largest bank failure since Washington Mutual in 2008. Historically, bank runs have been one of the primary causes of financial crises and there have been several notable bank runs throughout history. Here are a few examples and how they were contained:
- Great Depression: The most famous and devastating bank run in history occurred during the Great Depression in the 1930s. Many banks failed due to the stock market crash, and depositors panicked, leading to widespread bank runs. To contain the crisis, the US government created the Federal Deposit Insurance Corporation (FDIC), which guaranteed deposits up to a certain amount, easing depositors' fears and preventing further bank runs.
- Northern Rock Bank Run: In 2007, Northern Rock, a UK-based bank, faced a bank run triggered by the global financial crisis. The bank was heavily invested in subprime mortgages, and as the crisis deepened, depositors became nervous and started withdrawing their funds. To contain the crisis, the Bank of England provided emergency loans to Northern Rock to keep it afloat. The UK government eventually nationalized the bank to prevent its collapse and the subsequent damage to the financial system.
- Banco Popular Bank Run: In 2017, Banco Popular, a Spanish bank, faced a bank run due to concerns about its financial stability. The European Central Bank (ECB) stepped in and facilitated a sale of the bank to Santander, another Spanish bank, before it could collapse. The ECB's swift intervention helped to contain the crisis and prevent further damage to the financial system.
How does #SBVCollapse affect you?
Scenario 1— “My funds are in SVB”
Given the current state of Silicon Valley bank, many investors and startups are unable to make withdrawals and have their monies tied up in the system with the bank unable to pay out deposits. This would definitely have a significant impact on your net worth. Here are a few possible scenarios:
- Loss of Deposits: Based on SVB’s declaration of bankruptcy, there is a risk that you may lose some or all of your deposits. The extent of the loss depends on several factors, including the amount of deposit insurance available and the amount of funds the bank has available to pay its depositors. If your deposits exceed the amount of deposit insurance available, you could be at risk of losing a significant portion of your net worth.
- Disruption of Financial Services: A bank run can cause significant disruptions to financial services, including the ability to withdraw funds or make transactions. This can be particularly problematic if you rely on the bank for day-to-day financial activities, such as paying bills or receiving your salary.
- Decline in Asset Value: A bank run can also have broader economic implications, potentially leading to a decline in asset values and a broader economic downturn. If your net worth is heavily invested in assets that are vulnerable to these economic factors, such as stocks or real estate, you could see a decline in the value of your portfolio.
Scenario 2— “I do not bank with SBV, I am not affected”
If your funds are not in Silicon Valley Bank, then you would not be directly affected by the bank's bankruptcy. However, you may be affected by the broader economic implications that could stem from this bankruptcy which could indirectly affect your net worth. For example:
- Economic Downturn: SBV’s crisis can potentially lead to a broader economic downturn, which could affect the value of your investments, such as stocks or real estate. If the crisis leads to a recession or a slowdown in economic growth, your income or job prospects could also be affected.
- Credit Crunch: A crisis of this magnitude can also lead to a credit crunch, where it becomes harder for individuals and businesses to access credit. This can be particularly problematic if you rely on credit to finance your purchases or business activities.
- Government Intervention: A government intervention would be great for the depositors access their funds and keep being in business and to prevent a collapse of the banking system in general. However, this could also result in higher taxes or other forms of government intervention, which could indirectly affect your net worth.
While you may not be directly affected by a bank's bankruptcy, the broader economic implications of a banking crisis could indirectly affect your net worth and cost of living. It's important to diversify your investments and ensure that you have a contingency plan in place in case of economic disruptions. Here are some steps to take if you are affected by a bank run:
- Stay calm: Panic can make a bad situation worse. Try to remain calm and rational.
- Assess the situation: Find out the reason for the bank run and whether the bank is financially stable. If it is, there is likely no need to withdraw your money.
- Check your account balance: If you have enough money in your account to cover your immediate needs, you may want to leave your money in the bank and wait for the situation to stabilize.
- Consider alternative options: If you are worried about the stability of your bank, consider moving your money to a more stable bank or a credit union. Make sure the institution is insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA) to protect your deposits.
- Stay informed: Keep up-to-date with the latest news about the bank and the situation. Monitor news reports and contact your bank for updates.
- Seek professional advice: If you have a large amount of money in the bank, seek advice from a financial professional who can help you assess your options and make informed decisions.
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