In recent days, there has been news of a surge in withdrawals from two major US banks, Silicon Valley Bank and Signature Bank, leading to questions about their stability and the broader financial system.
A run on a bank is essentially a situation where a large number of customers simultaneously withdraw their deposits, leading to a sudden and significant drop in the bank’s liquidity levels. This can happen when there are concerns about a bank’s solvency or ability to meet its financial obligations. In such extreme cases, a run on a bank can lead to its failure and potentially trigger a broader financial crisis, as we have seen in past instances such as the Great Depression, the Savings and Loans crisis, and the 2008 financial crisis.
The sudden withdrawals from Silicon Valley Bank and Signature Bank have raised alarm bells. While it is too early to predict the exact reasons behind these withdrawals, several factors could have contributed to them. For example, there could be concerns about the banks’ exposure to risky assets, such as loans to high-risk sectors, which could lead to high levels of default. Alternatively, the withdrawals could be driven by rumors or speculation, which can be highly volatile and unpredictable.
It is worth noting that a run on a bank does not necessarily mean that the bank is on the brink of failure. However, it is a worrying sign and can lead to a loss of confidence in the bank, which can have disastrous consequences. Banks rely heavily on customer deposits to fund their lending activities, and a sudden drop in deposits can severely impact their ability to lend, leading to a credit crunch and potentially a recession.
Investors and regulators alike are likely to be paying close attention to the developments at Silicon Valley Bank and Signature Bank and assessing the risks to the financial system. It is important to monitor the situation closely and take appropriate measures to prevent any potential systemic risks.
In closing, let’s make a point that no one seems to make. Most, if not all banks practice fractional reserve banking. For example, If $100 is put on deposit, the bank will use $90 of it for loans leaving only $10 on deposit. If every depositor comes to make a withdrawal of funds, how would the bank be able to fulfill the withdrawal requests? Simple, it would not be able to. Any bank would fail regardless of the financial wherewithal or size of the bank given these circumstances. Please keep that in mind. Furthermore, FDIC insurance of up to $250,000 per deposit is a joke. If a bank fails and needs to be bailed out, taxpayer funds will most likely be used.