On March 10, Silicon Valley Bank (SVB) failed. Customers feared they would lose their money. The United States government took over the bank to prevent a financial crisis. Here are the details.
What is Silicon Valley Bank?
SVB was one of the 20 largest banks in the U.S. It served mostly tech companies, including Roku, which makes streaming devices, and the gaming company Roblox.
Why did SVB fail?
SVB collapsed because of a bank run. That’s when a bank’s customers try to take out all of their money at the same time because they no longer trust the bank. In just hours, SVB’s customers withdrew billions of dollars.
Why didn’t the customers trust the bank?
They were afraid SVB was in financial trouble. The bank was selling its investments to raise money. Banks don’t keep much cash on hand. They invest their customers’ money, hoping to make a profit. That’s how they afford to pay interest to customers. Most of SVB’s money was invested.
But because of rising interest rates, those investments were no longer worth what SVB had paid for them. Interest is the amount of money people spend to repay a loan, or the money a bank pays customers who deposit money in a savings account. In the past two years, the U.S. government has repeatedly raised interest rates, to discourage spending and to slow inflation. Higher interest rates typically cause investments to lose value.
Why is SVB’s failure a worry?
It could cause a panic. Customers at other banks might withdraw all their money, causing those banks to fail. That happened at Signature Bank, which shut down a couple of days after SVB did. More bank failures would lead to an economic crisis.
How is the U.S. government responding?
It says SVB’s customers will get their money back. That includes deposits worth more than the $250,000 limit for Federal Deposit Insurance Corporation insurance. The government plans to sell SVB’s assets, and will loan money to banks affected by high interest rates, so they can pay customers. “Americans can have confidence that the banking system is safe,” President Joe Biden said on March 13.
What happens next?
Interest rates were expected to rise again on March 22. Some experts say this is no longer likely.
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