By Monique Conrod
This article uses some financial terms that may be unfamiliar to you. The words with an asterisk (*) are explained at the end of the article.
A large bank in the United States was shut down on March 10 because it didn’t have enough money to pay out to its customers.
Silicon Valley Bank (SVB) is based in California. Many of its customers (the people who deposit* money in the bank) are technology companies, such as Etsy, Roblox and Roku. Most had deposited large amounts of money in SVB.
When people or companies deposit their money in a bank, the bank only keeps some of that money as cash. It invests* the rest, to earn even more money with it.
SVB invested a large amount of its money in US government bonds.* Bonds are usually a safe way to invest money, but several things happened that caused problems for SVB.
First, the prices people pay for goods and services began to go up all over the world. That’s called inflation.
To help fight inflation, the US Federal Reserve, which oversees the United States’ banking system, raised the interest rates it charges to lend money. This caused other banks to raise their interest rates, too. That meant that people would have to pay higher fees if they borrowed money.
Many of SVB’s depositors had borrowed money. Now they needed more money to repay those loans. They also needed money to run their businesses and pay their suppliers and employees.
But many tech companies weren’t making as much money as they had during the COVID-19 pandemic, when everyone was using their services. To cover all of their costs, they began taking extra money out of their accounts at SVB.
To make sure it had enough cash to give to all of the depositors who wanted to withdraw money, SVB had to sell the bonds it had invested in. But, because of inflation and higher interest rates, the bonds weren’t worth as much money now. When SVB sold them, it lost about $1.75 billion (US).
This news made people worry that SVB was in trouble. Because people were concerned about the bank, its value on the stock market dropped by about $160 billion (US).
SVB’s customers began to panic. Some of them took all of their money out of the bank immediately. Then other customers were afraid the bank would run out of funds, so more and more of them tried to withdraw their money. This is called a bank run, or a run on the bank. Eventually SVB shut down, or collapsed.
There is good news for people who had money in SVB but had been unable to get it out (withdraw it) before the bank collapsed. Those people will get their money back.
That’s because the US government decided on March 12 to let the FDIC take over the management of the bank. The job of the FDIC, or Federal Deposit Insurance Corporation, is to protect deposits in cases just like this one. (FDIC doesn’t protect all deposits in the US, but the government has now put it in charge of protecting SVB’s deposits.)
The government did this to help the tech companies stay in business. It also wanted to reassure customers of other banks that their money is safe, so there won’t be any other bank runs.
Could this happen in, say, Canada?
Experts say it is unlikely a Canadian bank would collapse like SVB. There are fewer banks in Canada and each one is larger, with customers from a variety of industries (rather than just one, such as tech).
Canadian banks also have to follow stricter rules about how they invest depositors’ money, and how much money they keep as cash, so their customers’ money is better protected.
Most bank deposits in Canada are guaranteed by the Canada Deposit Insurance Corporation (CDIC). If a Canadian bank did collapse, CDIC would make sure its customers get their deposits back.
Simplified financial definitions
Here are some basic definitions to help you understand some financial terms. The definitions have been simplified so they are as easy as possible to understand.
Interest: Money that your money earns. Let’s say you put $10 in a piggy bank. A month or a year later, you would still have just $10. But if you put money somewhere like a savings account at a bank, or if you invest it in stocks or bonds, it can make more money. That “extra money” is known as interest.
So let’s say you’ve put your money in a bank where it earns interest. When you decide to take it back, there would be not only the $10 you started with, but a bit more. How much more? That depends on where you’ve put (or “invested”) the money and how long you’ve left it there.
Invest: To invest money, you can buy something like stocks (shares of a company) that you hope will increase in value, or you can lend the money to someone who agrees to pay back that money plus extra fees called interest.
Deposit: To put money in a bank (or somewhere like a bank), usually because you want to keep it safe and hopefully earn more money, or interest, on it.
Bond: When you purchase a bond, you are essentially lending money to a government or a company. You do that, hoping to earn more money (interest) on it. Bonds usually earn more interest than a savings account but unlike a savings account, you need to keep your money in the bond (usually for a few years) until it “matures” and you can take it out.
Think and Discuss
- The article talks about a bank “collapsing.” Collapse can mean that something physically falls down, but that’s not the way it’s used in this article. What does “collapse” mean in this article?
2. Did you understand everything in this article? Overall, if someone asked you, “Why did SVB collapse?” could you answer them? What would you say?
2A. Make a T-chart and on one side, list the facts you understood from the article. On the other side, list the questions you still have or the things you don’t understand. What does your T-chart tell you about your experience with this article?
3. What happened to SVB is unusual. Using information from the article, discuss why money in banks is usually safe.
4. Make a list of some of the things that may have contributed to (helped to bring about) the collapse of SBV.
5. What do you know about money, saving and investing? Do you think it’s important for young people to know about these things? Why or why not?
6. Why do you think the article, about a US bank, mentions Canadian banks as well?
7. If you live in a country that is not the US or Canada, what do you think of your country’s banks? Where could you find out more information about them?
8. Below are some links to information that is in kid-friendly language, that explains some things about money and investing. In some cases that information was written by banks. Why do you think the “source” of information is important? In this case, why do you think it matters that the information was created by banks?
Investing explained for kids (created by Tangerine bank): https://www.tangerine.ca/forwardthinking/investing/how-to-explain-investing-to-kids
Games and activities, (broken down by age group) that help teach kids about money (from TD bank):
Scotiabank offers these things parents can do to help teach young people about money:
Opinion (column) from Financial Post (Canada) about why the collapse happened:
The Guardian (UK): Biden Calls for Penalties on Executives of Failed Banks