Banks Go Kaboom.

Science/Business | David Wu | March 27th, 2023.

On March 10th, Silicon Valley Bank, the 16th largest bank in the United States by asset value, collapsed in 48 hours, leading to the second-largest bank failure in United States history. Approximately 48 hours after, Signature Bank in New York City collapsed -- the third-largest bank failure in United States history. Across the Atlantic Ocean, Credit Suisse, the second-largest bank in Switzerland, had to be bought by USB and saved by the Swiss Central Bank to prevent collapse. The story of Bank fiascos doesn't end there: First Republic Bank crisis, banking stock collapse, US Treasury no-bail, etc. Just a week ago, all these financial institutions were well-respected, and no one would ever dare to imagine billions of dollars evaporating under the banking collapse. How did these events occur so quickly? And what do they mean for students and the general public?

The chain of reactions led to the tipping point of the first domino: Silicon Valley Bank (SVB). During the COVID-19 pandemic, SVB recorded a growth in deposit holdings and purchased long-term Treasury bonds to take advantage of the increased deposits. However, when the Federal Reserve increased interest rates to control the 2021-2023 inflation surge, it caused the current market value of the bonds to diminish. Additionally, this increase in interest rates increased borrowing costs across the economy, and some of SVB's clients began to withdraw money for their liquidity requirements. Therefore, SVB declared on March 8 that it had sold over $21 billion of securities, borrowed $15 billion, and would conduct an emergency sale of some of its treasury stock to raise $2.25 billion. As a result of this announcement and warnings from prominent Silicon Valley investors, a bank run ensued, with customers withdrawing a total of $42 billion by the next day. Consequently, on March 10, 2023, the California Department of Financial Protection and Innovation (DFPI) took over SVB and placed it under the receivership of the FDIC. The chain reaction after the first domino resides in the depositors’ diminishing trust in the banking industry, which is usually reflected by the fire withdrawal of bank deposits. This may lead to further bank failures because, just like SVB, banks may not have enough reserves to return the deposits while suffering bond losses. As of early 2023, every central bank in the US has millions in treasury bond unrealized losses. Since US bonds are sold internationally, that’s also how Credit Suisse and other international banks experienced the pressure of the domino effect. 

If you don’t have your money in small banks or highly volatile assets, your money is safe in large retail banks, such as Bank of America, Chase (owned by JP Morgan), or Wells Fargo. Moreover, even if you have banked with smaller institutions, all deposits under $250,000 are FDIC-insured (unless you have more than that, congratulations). The people that need to worry are the technology startup CEOs and CFOs  with financial capital/assets in SVB and regional banks; they need to transfer their money to larger financial institutions as soon as possible. Nonetheless, this banking collapse creates personal finance experience opportunities for regular high school and college students. 

There are specific rules to follow when the overall economy is experiencing some extent of a financial meltdown. 

Number one: If you are a student with some savings, consider switching to a more secure financial institution. Research the bank’s financial health and safety ratings to ensure your money is safe. 

Number two: Limit your exposure to the stock market and focus on more conservative investments. If you want to invest, try conservative investments, including certificates of deposits or ones independent of the macroeconomic environment. Low risk does not mean low awards. The steady income stream could rival high-risk stocks if you compound your deposits over the years. 

Number three: Be aware of the current economic climate and keep up to date with any news or changes in the banking sector. You are responsible for your financial assets, and by reading the news and communicating with peers, you gain valuable insight into the foreseeable future. 

Number four: Create an emergency fund to ensure you have enough money for unexpected expenses. This applies to our fellow students who have jobs or another form of income -- pay yourself first! Get 10% of your income and save it for future emergencies. 

Number five: Consider diversifying your investments and look for alternative investments such as gold, silver, or resource ETFs. This is only important for students who are active traders and investors. Leveraging your covariance under such occasions decreases your systematic risk, which is done by investing in the “opposite” of fiat currency: tangible assets. Quick notice: Although more tangible than the United States dollar, Bitcoin is not a conservative investment due to its high volatility.

These are uncertain times, and it is hard to predict the economy's outlook, especially after the Federal Reserve hikes interest rates in such a horrific financial climate. Nonetheless, I hope the tips for us students provide some security and reassurance that everything will be fine in the long term; look at the 2008 Financial Crisis -- we got back on our feet eventually.