Understanding How a Bank can Fail

This past week, Silicon Valley Bank (SVB) was closed by banking regulators. Let’s understand the basics of how this happened and why it matters to the tech industry. 

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SHOW NOTES:

• FDIC Creates a Deposit Insurance National Bank of Santa Clara to Protect Insured Depositors of Silicon Valley Bank, Santa Clara, California (March 10)
• FDIC Update on SVB Bank and Access to Deposits (March 12)
• Joint Statement by Department of Treasury, Federal Reserve and FDIC (March 12)

HOW CAN A BANK WITH SO MUCH MONEY SHUT DOWN?

• Banks never hold all the money that they have on the books as deposits
• Banks manage a portfolio of investments
• Banks try and manage the portfolio within certain ratios
• Banks have regulations

LEVERAGE, INTEREST RATES, RISK, TIMELINES, COMMUNICATIONS and PANICS

• Basics Part I - Systems built on Trust, Regulations to Enforce Actions
• Basics Part II - What is SVB?, Deposits vs. Investments, Leverage, Interest Rates
• Higher interest rates increases the risk of existing investments
• Valuations vs. Valuations on Paper
• Insurance, Diversified Portfolio
• Cloud Analogies - Single vs. Multi-Cloud, Shared Resources Risks, Profitability of a Service, Best Practices vs. Practicality, Rising Costs (or Shortages) 

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