Banks are indeed the best place to keep your money. Various benefits can be obtained by saving money in the bank.
Keeping money in the bank makes your money safer. It is almost impossible for theft or even fire to make your money disappear.
Even in the event of a fire, the bank has insured your money. Or they just report to the central bank about the amount of money burned, but they have a digital record of the amount of money burned and who owns it. In short term, it's safe.
Another advantage is the ease of transferring money for various purposes such as paying employees or purchasing production materials to receiving payments from customers. In addition, using this method makes bookkeeping easier because each transaction has been digitally recorded by the bank, so you will work less.
Banks also offer a decent interest rate on savings, although sometimes it may not be able to keep up with inflation. But it's better than letting your money sit without earning any interest.
So, what happened to Silicon Valley Bank?"
Deposit Flooding
The incident that happened at Silicon Valley Bank began with the increase in deposits. At the end of 2019, deposits in this bank were around 160 billion USD, while by the end of 2022, it had increased to 173 billion USD.
This happened because Silicon Valley Bank serves various startups and technology companies. When Covid happened, technology usage increased, so many startups and tech companies received funding and placed it in Silicon Valley Bank.
The increase in deposits at a bank is sometimes seen as a success, but it can also be a disaster. This is because if a bank promises a savings interest rate, the bank must be able to generate more money than the promised savings interest rate.
Therefore, it is a good idea to invest in assets that are easily liquidated. Such assets include shares in public companies and bonds issued by credible organizations but stay in safe portofolio. Too much long term bond in portofolio sometime is tricky.
What's worse is if customers withdraw their funds from the bank en masse, even though the bank has been managing their money to invest in things that can help the economy.
Bond Panic Buying
The increase in deposits at Silicon Valley Bank since late 2019 until the end of 2022 has almost tripled. Good management is needed to face this issue.
Silicon Valley Bank is trying to invest in assets that are known to be low-risk and easy to liquidate. These assets are bonds.
Buying bonds has many advantages such as earning interest income and helping to stimulate the economy, especially during the Covid pandemic that required immediate liquidity.
However, what Silicon Valley Bank did was to buy bonds that have a long maturity of more than 5 years. Bonds with long maturity have greater risk than those with shorter maturity.
This is because central bank policies can change, which can affect the market value of bonds. Bondholders can either gain or lose.
Rising Interest Rate
It is known that the bonds held by Silicon Valley Bank amounted to 117 billion USD, with a fairly good interest rate at the time.
However, as the central bank continued to raise the interest rate, it reached more than 4.5%. The increase in the central bank's interest rate had an impact on the market value in the bond market.
If the bonds you hold have a lower interest rate than the current central bank's interest rate, then the value of your bonds will decrease. This is actually not a problem if you do not intend to sell the bonds you hold, as you will still receive interest from the money you invested without losing anything.
The problem arose when Silicon Valley Bank's customers panicked and wanted to withdraw their money from the bank. This made Silicon Valley Bank have to sell the bonds they held and incur losses of billions of US dollars.
Perhaps the reason why customers wanted to withdraw their funds from Silicon Valley Bank was to buy bonds with very high interest rates at the time. It is known that a 2-year Treasury Bond has an interest rate of 4.63%, while typically bonds issued by the private sector would have a higher interest rate than that.
Bail Out
The crisis that occurred at Silicon Valley Bank could become a very severe crisis. This is because nearly half of the startups in the United States rely on this bank, and many startups outside the United States also rely on this bank.
What is most important now is not the shareholders, but the depositors. This is because if depositors are saved and the bank regains its trust, then shareholders will benefit or recover in the future.
Silicon Valley Bank's stock has dropped dramatically since this issue arose. Its stock has fallen by 65% in a month. A month ago, Jim Cramer was shouting on CNBC to buy the bank's stock.
The United States government is making efforts to rescue depositors whose money is stuck there. However, it is not using taxpayer money, but using fees that banks pay to the Depositor Insurance Fund program.
In addition, Silicon Valley Bank will be taken over by the government for a certain period of time until it finds a new shareholder buyer. The board of directors will also be fired.
