Here’s something that really worries me with the Silicon Valley Bank / SVB collapse of late. SVB are not a huge player in the global scheme of things but the run of money out of the bank has caused the stock market globally to take a fair hit. The company itself has gone into administration. This means that basically a large number (or maybe a small number of people with BIG deposits) all took money out of the bank at the same time and the bank wasn’t able to meet the withdrawal requests. SVB was subsequently placed into administration.
I worked in a bank almost 20 years ago. I know that with large withdrawal requests (in the days of cash) you’d need to give your bank some warning. Different banks, different thresholds. But what about digital withdrawals? If the bank has used the money to fund loans or other investments (which is what most banks do) they would have some warning to free up some funds to cover their withdrawal requests. But what about digital transfers? This can happen over night without warning.
Would it be be possible for large investment firms to get together (Bear in mind this would be illegal) and agree to all withdraw money from a bank at the same time to crash a bank? Especially if they had short options on it? What if the bank was seen as some sort of competition? What if fear of another global collapse is all that’s needed to get to the point where people around the world started withdrawing their deposits at the same time? What would happen to the banking system?
THE SHORT STORY ON THE SVB COLLAPSE
To some degree this was some bad luck on the part of SVB as the interest rate rises in the US meant some companies needed to pull out cash at the same time. Fair enough this can happen in business. SVB couldn’t cover the cash. SVB had to sell investment bonds at a loss to meet this commitment. Bonds were sold at $1.8billion dollar loss. To cover this loss the company had to then sell off its own shares. The glut of shares on the market caused the shares to drop 60% in price instantly. As you can imagine this is where things could get worse as onlookers would see a share price crash and feel the need to also withdraw their savings. The shares were frozen and placed into receivership by the FDIC to sort out the mess and make sure investors got something back. (Read more about this HERE and HERE if you’re keen to get the story as we know it at this point)
Like I said before this was unlucky but I really could see this happening a few more times if indeed the predictions of a coming recession come to fruition. Maybe the recession doesn’t even need to happen? Like I said before Maybe the FEAR of a recession could cause a bunch of deposit holders (or even stock holders) to get nervous and pull out all their investments from other institutions/companies? Cash may yet still be king.
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