A Bank run is when the bank suffer a liquidity squeeze as the depositors starts to withdraw majority of the cash from the bank, thus emptying out the cash available in the bank.

Why do the depositors wants to withdraw their cash?

In the case of SVB, I noticed there are 3 main reasons and there’s some lessons for us to learn here.

1. Majority of their customers (depositors & borrowers) are ventured backed start ups. The past years have been bad for starts up in raising funds as the interest rate rises, hence many start ups starts to drawdown money from their deposits to fund their company operations. As a result the bank deposits dropped.

2. Bank make money by lending money. It’s the same for SVB as well. Problem is majority of their customers are start ups, and with poor economic conditions, they have many bad loans in their portfolio. Bad loans means their customers couldn’t service the repayment of the loan back to the bank. This caused the bank to lose money and also revenue dropped since their earnings depends hugely on their loan repayment performance.

3. Of course, once the news of these 2 above start to announce on public since SVB is a public listed company, the confidence level of the customers and the investors dropped. Customers starts to withdraw their money and park in other more credible banks. Investors become wary of SVB and stopped or slowed the funding of the company. Lenders of SVB starts to charge higher fees to SVB for lending their money to SVB. All these factor have a domino affect on SVB, and the outcome become a bank run.

Before some of my crypto friends starts to comment that that’s why you should park your money into cryptocurrency, it’s only a few days before that another cryptoBank goes bankrupt too. A private wallet might solve the problem, but money is meant for transactions and spending as well. I shall not comment on my take on cryptocurrencies in this post.

Let’s draw some lessons from this episodes then.

1. If you want to park your money in a bank, don’t be tempted to always put it in the highest yielding bank account. There’s a reason why they want to pay high yield to you where else some other banks do not. Check on the credibility of the bank first.

2. Park your money in a bank which has diversified business. Since their business is mainly in disbursing loan, you want to make sure that the bank is not geared towards any particular segment in their loan portfolio. In SVB case, it was too heavy on start ups.

It’s only when the tide goes out that you learn who has been swimming naked

Warren Buffett

When times were good, any company can make money. SVB’s vulnerability became exposed when times turn bad.

3. You don’t have to park your money in bank only. It’s not the only place to deposit your money. Other than bank, where else can you park your money which is safer and achieve liquidity as well? Treasury bills, Money Market Funds, Insurance Policies just to name a few. Of course, please don’t put money in your biscuit tins. Inflation will not only erode them, some ants will probably eat them up!

As interest rates is expected to continue to climb further and not reducing anytime soon, I think many people are going to be panicking and start withdrawing their money from their bank if it’s deem to be weak. As such, more banks or cryptoBank are expected to suffer a bank run in the near future. Let’s watch it!