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  • Veronika Ferstl

SVB bankruptcy triggers bank run!

A report on the investigation into the causes and the possible consequences.

Due to the recent rise in central bank interest rates, bank defaults are increasing.

This happens when debtors become insolvent due to the more expensive loans.

What is the consequence?

The bank that gave the loan is left with the debt, which in turn can mean that the bank can no longer serve its creditors (e.g. bank customers).

What? I thought the money I put in the bank was mine!?

Wrong thought!

A bank account, regardless of whether it is a checking account, an overnight money account or a savings account, belongs to you. BUT: Contrary to popular belief, the money on it is unfortunately not. All amounts of money in accounts belong to the bank!

When you deposit money into an account, you are giving the bank an interest-free loan, for the most part. The moment you transfer money to an account, you have a claim against the bank. At the same time, the bank enters into a liability with you.

You are the creditor of the money, but not the owner. As a rule, a borrower, in this case the bank, has to provide collateral. Otherwise you will not get credit. In the case of a bank account, this is not the case.

In concrete terms, this means that you as the creditor place your money in the custody of the bank so that it can work with the amounts of money. As security, you will receive a repayment claim from the bank, but nothing more. This means the business is based on the TRUST you place in the bank.

Why is everyone talking about SVB?

SVB (Silicon Valley Bank) is one of the largest banks in the US and mainly finances tech start-ups.

Unfortunately, the bank took a very big risk with customer funds, because 57% of its investment portfolio was in bonds and MBS (Mortage Backed Securities)[1].

[1] An MBS is a mortgage-backed security, meaning it is one of a group of asset-backed securities issued by a special purpose entity that pools multiple mortgage loans as bond backing.

So what happens when interest rates rise?

Right, bond prices are falling and yields are rising. But the SVB simply did not hedge this interest rate risk. Normally such risks are covered by hedging.

A few days ago, SVB announced a capital requirement in the billions.

After the announcement that the bank was in payment difficulties, the SVB stock market price collapsed. Now the bank will probably be closed. This also threatens their customers with insolvency since they can no longer access their funds. Employees are laid off, suppliers and business partners are no longer paid. VC funds no longer get their investment back. A great tech death threatens worldwide.

There is still a threat of a new US banking crisis, as trust in banks has once again been massively shaken and bank customers are withdrawing their funds in panic. This means that many other banks will find themselves in crisis.

What could happen?

  • The domino effect could bring down many companies.

  • The probability of a bank run increases.

  • This may trigger another banking crisis.

What do we learn from this?

-> Risk management counts!

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