In a panic, all SVB customers demanded to withdraw their money at the same time, causing the bank to go bankrupt, being forced to sell investments at a loss to repay them.
We are talking about bank run when all the customers of a bank panic and want to withdraw their money at the same time. This is what happened to Silicon Valley Bank, victim of an express bankruptcy on Friday March 10. However, a large part of the money deposited by a bank’s customers is placed on the financial markets and is therefore not immediately available. When all customers claim their due at the same time, the bank can no longer follow, for lack of sufficient liquidity. This is what happened to the Silicon Valley Bank, whose bankruptcy caused a wave of panic to blow through the markets.
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Little known to the general public, the SVB specialized in financing start-ups. The bank had invested in treasury bills and bonds, investments deemed safe, as they are guaranteed by the State, until they become America’s 16th largest bank. “It worked well until interest rates were raised sharply, which drastically reduced the value of its bonds in the markets”explains David Wessel, specialist in the banking sector, interviewed by 20 minutes.
Except that a few weeks ago, the tech sector began to experience difficulties. Silicon Valley Bank’s client start-ups therefore wanted to recover some of their money. But the SVB, not having enough liquidity (ie cash available immediately), had to sell its bonds at a loss.
A self-fulfilling prophecy
As is often the case in the financial markets, everything is a question of trust. As soon as the SVB showed signs of fragility, more and more customers took fright and wanted their money back. This is where the bank run started. By imitation, those who had a bank account at the SVB wanted to empty it.
We can even compare this phenomenon to the fuel shortages that may have affected France, a self-fulfilling prophecy, according to Yamina Tadjeddine-Fourneyron, professor of economics at the University of Lorraine. “The fact of believing in it provokes the event. If it is said that there will be no such product, consumers cause the shortage by rushing to buy it”she illustrates in The Parisian.
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It was to deal with this phenomenon that Greek institutions had regulated access to ATMs during the debt crisis in 2015. At that time, citizens had lost confidence, and had rushed to the banks to get their money back.