Since the swift collapse of Silicon Valley Bank, the entire banking system has been in turmoil. The news of failed and struggling banks has left millions of Americans with pressing questions.

Some of the breakout searches on Google this past week include: What caused the banking crisis? Are we headed for a depression? Is my money safe in the bank?

In this special report and the reports to follow, Straight Arrow News is working to answer these questions, provide the context behind what’s happening and bring on experts to tell us what they think is coming next in banking.

What happened to Silicon Valley Bank?
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The California bank was a bit of a special breed. It called itself, “the financial partner of the innovation economy,” and claimed to bank nearly half of all venture-capital-backed startups in the U.S. In other words, it had a pretty homogenous client base.

Commercial banks usually make money by taking in customer deposits and then using that money to dish out loans to other customers, earning money on the charged interest. But for the past couple of years, many of SVB’s customers didn’t really need loans. The startup world was flush with venture-capital cash because with low interest rates, money was cheap. By the end of 2022, SVB said it had $212 billion in assets.

In lieu of providing more loans, SVB used a lot of its assets to buy up large amounts of interest-bearing government bonds, and planned to hold those bonds until they matured. Here’s where its problem started.

With inflation at 4-decade highs, the Federal Reserve started rapidly hiking interest rates starting in March 2022. Money started draining out of the startup world and SVB’s customers needed to take out their money to pay bills and make payroll. But SVB had a lot of it tied up in these bonds. And because interest rates had gone up, their lower-interest-yielding bonds were worth less on the open market.

On Wednesday evening, March 8, SVB announced in a press release that they were trying to raise money by selling more shares. The bank also said they sold $21 billion worth of bonds at a $1.8 billion loss. It was trying to shore up its balance sheet and add liquidity but it caused its customers to panic. Big-time VC firms started telling startups to pull their money and it triggered a bank run.

On Thursday alone, March 9, customers attempted to pull out $42 billion, 20% of the bank’s total assets. That’s way more cash than any bank is required to have on hand and SVB certainly didn’t have it liquid.

“We wired out the money yesterday, but Silicon Valley Bank did not honor our wire,” Shelf Engine CEO and SVB customer Stefan Kalb said March 10. “So we were not able to move any of our cash out of our bank account. Unless someone comes in and is able to support Silicon Valley Bank through an acquisition, through other means, a lot of us are going to be in a very painful situation very quickly. And so the big ask is for the federal government to come in and step in.”

By Friday, March 10, federal regulators took over the bank and shut it down. Two days later, on Sunday, New York-based Signature Bank became the next casualty as customers there worried their deposits would also be unsafe.

Stopping a nationwide bank run
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A bank run happens when a large amount of customers attempt to withdraw their money at the same time over fears surrounding the bank’s solvency. Because banks typically only hold a small percentage of assets in cash, withdrawal requests that exceed what they have on hand can cause insolvency, like with SVB.

When a bank run happens, there is little a bank can do if it can’t unload assets in time. Customer fears can be exacerbated when their deposits are uninsured.

“Everybody’s insured up to $250,000, but these are small startups and other firms that have multimillion dollars – or cryptocurrency firms that are having a stablecoin, in the case of Signature [Bank] – where there’s bunches of millions of dollars, and they want to take them out. Because it will be uninsured, it will be frozen in this bank, short of what the regulators did over the weekend,” Public Citizen financial policy advocate Bartlett Naylor said.

One week ago, federal regulators took extraordinary steps to protect the uninsured customers of failed Silicon Valley Bank and Signature Bank. While the FDIC insures deposits up to $250,000 (more on that below), more than 90% of accounts at both banks were over the limit.

“Rest assured, they’ll be protected, and they’ll have access to their money as of today,” President Joe Biden said on March 13.

Unlike the bank bailouts of 2008, regulators did not use taxpayer money to make depositors whole. Instead, they drew from the government’s bank Deposit Insurance Fund, which FDIC-insured banks across the country pay into. The government said any losses to the fund would be backfilled by a special fee on banks.

“We felt that there was a serious risk of contagion that could have brought down and triggered runs on many banks,” Treasury Secretary Janet Yellen told senators on March 16.

“Much as regulators and our president is trying to reassure us, this system runs on faith,” Naylor said.

And that faith is shaken. For more than a week, Americans have been pulling their money out of smaller regional banks and putting it into banks considered “too big to fail,” which has helped exacerbate the crisis of confidence in regional banks, from First Republic to PacWest.

While the federal government made the decision to fully secure the uninsured deposits at Silicon Valley Bank and Signature Bank, Yellen said banks will only get that treatment if the federal government believes letting it fail would create systemic risk and significant economic consequences.

“What is your plan to keep large depositors for moving their funds out of community banks into the big banks?” Sen. James Lankford, R-Okla., asked Yellen. “We have seen the mergers of banks over the past decade. I’m concerned you are about to accelerate that by encouraging anyone who has a large deposit in a community bank to say, ‘We are not going to make you whole but if you go to one of our preferred banks, we will make you whole.’”

“That’s certainly not something that we’re encouraging,” Yellen answered. “That is happening right now because depositors are concerned about the bank failures that have happened and whether or not other banks could also.”

Is money safe in the bank?
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This is one of the most important questions to answer, and the short answer is yes, up to $250,000. Now here’s the longer answer and how to maximize coverage beyond $250,000.

Most banks are FDIC-insured. As long as a customer banks with a FDIC-insured bank, the money is safe up to $250,000, per account owner, per account type, per institution.

That means if a couple is married and has a joint bank account in Bank A, they could have up to $500,000 insured between the two of them. One of them could also have a single owner account at the same institution and be covered for an additional $250,000 in that account. The FDIC explains on its website the different account types one can use to spread out coverage. Money market deposit accounts are also insured up to $250,000.

A single person who has more than $250,000 to bank can also divvy it up into different institutions and be covered. That person could put $250,000 in Bank A, $250,000 in Bank B, $250,000 in Bank C, and so on.

Credit unions also come with a similar $250,000 guarantee. Instead of the FDIC, the National Credit Union Administration is what secures credit union deposits up to $250,000. So from credit union to small community bank to so-called “too big to fail” institution, under that limit, money is safe in the bank.

Credit Suisse is the latest bank to fall
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As banking turmoil spreads around the world, over the weekend Switzerland’s largest bank agreed to buy its struggling rival, Credit Suisse, in a deal worth $3.25 billion. Credit Suisse has faced its share of troubles for years, but the stunning end to the 166-year-old institution is continuing to shake markets.

Swiss authorities cut a deal with UBS to acquire Credit Suisse, which includes $280 billion in state and central bank support, according to Reuters reporting of the deal documents. That is equal to about a third of the country’s gross domestic product. Yet Swiss Finance Minister Karin Keller-Sutter insisted the move is not a bailout, but a commercial solution needed to stop potential contagion.

“I don’t think it’s going to [stop contagion] at all, I think it’s going to exacerbate it,” said Hal Lambert, founder of Point Bridge Capital and a former director at Credit Suisse. “What you’ve created is this monstrous bank in Switzerland… you have one institution now that literally could collapse the Swiss economy if it were to have a problem. So this is not the end of things, this is the very beginning of something they’re going to have to work through over many years to try to reduce that systemic risk.”

Lambert said the forced takeover could create even more fear. Global markets wobbled Monday on the news before rallying on hopes the banking crisis is easing.

It all started with the March 9 bank run and subsequent collapse of Silicon Valley Bank, followed by the failure of Signature Bank. By the time Credit Suisse released its annual report on March 14 declaring the bank had found “material weakness” in its financial reporting, faith in the institution was shaken.

“[Credit Suisse has] had problems for years and they’ve lost billions of dollars in bad decisions. It’s really been poorly managed for the last few years,” Lambert said. “Swiss National Bank should have started a much longer time period ago, they should have been on this a couple of years ago and looking for solutions to reduce the risk of Credit Suisse.”

Lambert said he believed had U.S. banks not triggered turmoil, Credit Suisse would still be standing today. But the obvious cracks at Credit Suisse made it vulnerable to a takeover, which Swiss regulators orchestrated with UBS.

“Let me be very specific on this: UBS intends to downsize Credit Suisse, its investment banking business, and align it with our conservative risk culture,” UBS Chairman Colm Kelleher said Sunday.

“I think there’s gonna be a lot of layoffs,” Lambert predicted, along with more outflows from investors who had assets at both banks. “When you combine them, they’re going to look out and go, ‘Wait, I don’t want to have this much at one bank now, because I’ve already spread my risk out.’”

In a country that relies on financial services to drive its economy, Lambert said the pressure is on Switzerland to make sure the end of its No. 2 bank does not mark the beginning of a banking crisis in the country.

LEARN MORE: Former FDIC Chair calls guaranteeing 100% of deposits at banks a ‘mistake’

It’s a big week ahead in business with banks in crisis. The Federal Reserve is meeting Tuesday, Mar. 21 and Wednesday, Mar. 22. Will its fight against inflation take a backseat to the banking crisis? Or will it still hike rates despite the turmoil? Stay with straightarrownews.com for unbiased, straight facts.