So, uh, what just happened in banking?
Lesson summary
Hi there everyone, I’m Jeff and this is Plain English, where we help you upgrade your English with current events and trending topics. JR is the producer and he has uploaded the full lesson to PlainEnglish.com/562.
Coming up today: The American and European economies are not in recession. Companies are not failing. People are paying back their loans. So why are so many banks in trouble? To understand today’s lesson, you’ll want to go back and listen to the very timely Lesson number 540 , where we talked about how banks fail. But today, I’ll tell you what happened at Silicon Valley Bank and at Credit Suisse; they are two different but related stories.
In the second half of the lesson, we’ll talk about the English expression “herd mentality.” Let’s get going!
Banks fall amid shaken confidence in global system
Credit Suisse, a 167-year-old bank in Switzerland, failed over a weekend in March. Silicon Valley Bank, the bank many of your favorite tech companies use, failed in March, too. And that wasn’t all. Silvergate Bank, a bank used by crypto firms, also collapsed. What’s going on?
If you listened to Lesson 540 , you know banks can have either a liquidity crisis or a solvency crisis. And the short answer is that the banks that failed in March 2023 had liquidity crises. So let’s start at the beginning.
Remember that banks take deposits from customers that open bank accounts. And they don’t just put that money in a safe. They lend the money out to people who want to borrow money: businesses, real estate developers, home buyers, what have you. Depositors have the right to request their money at any time, but the borrowers don’t have to pay their loans back for a long time. So the whole thing depends on depositors not asking for all their money all at once. And most of the time they don’t.
Well, Silicon Valley Bank is a bank in, you guessed it, Silicon Valley. Many of your favorite tech companies banked there, as did their venture capital backers. But Silicon Valley Bank didn’t make a lot of loans.
Instead of making loans, Silicon Valley Bank took their deposits and bought a lot of long-term U.S. Treasury bonds. A bond is a promise to pay the money back, with interest every year. So the bank owed money to depositors. And the government owed money to Silicon Valley Bank. And everything was in balance.
The market assumes that Treasury bonds will never default; the government will never not pay the bonds back. But—and this is a big but—Treasury bonds can go down in value.
What happens is, if interest rates go up, then the market value of a bond goes down. You can still hold onto the bond until it matures, no problem, without losing any money. No problem, perfectly safe and sound. But if you have to sell a bond before it matures, you won’t get all your money back.
This is the problem that Silicon Valley Bank faced. They took customer deposits and bought a lot of long-term bonds when interest rates were low. Then interest rates went up. The market value of their bonds went down. That wasn’t bad in and of itself . They could still hold onto their bonds and get all their money back at the end of the term if that’s what they wanted. They disclosed this in a footnote in their financial statements. Yawn.
But a few people read the footnotes (who knew?) and those few people moved to the exits—they moved their money out of the bank. There were some e-mails or messages among friends. And there might have been a Tweet. And then more and more people started pulling their own money out of the bank.
And since many of the customers were all in the same state, in the same industry, with friends in common, following the same Twitter accounts, the herd mentality took over. Everyone rushed to the exits, and Silicon Valley Bank ran out of cash to give its depositors.
Note that this was a liquidity crisis, not a solvency crisis. The bank had the Treasury bonds to match the depositors’ requests; they just didn’t have access to that value right away. And if they needed to get the money right away, they would have to sell the bonds at a loss. So the government stepped in and did its duty to save the bank at the last minute.
Now. Credit Suisse is a 167-year-old bank in Switzerland. It started by lending money to develop Switzerland’s railroads. It was one of the biggest consumer banks in Switzerland. But more importantly, it managed money for some of the world’s wealthiest people.
Credit Suisse did not face the same problem that Silicon Valley Bank did. But banking is a confidence game. Once people’s confidence is rattled, they start to worry about the whole system. And they start looking to see if there are any problems they need to worry about with their own banks.
Credit Suisse—despite its pedigree —was the weakest of the world’s biggest banks. Many of its customers were sophisticated people with a lot to lose. They didn’t want to take any chances. And honestly many people were moving their money out of Credit Suisse even before March.
But what happened at Silicon Valley Bank was enough to make people look closer at the stability of their own banks. And a lot of Credit Suisse customers didn’t like what they saw—not for the same reasons, but they had other reasons to question Credit Suisse’s long-term stability.
And so there was a bank run on Credit Suisse, too. Again, they had the assets to give depositors their money back. Again, they didn’t have it right away. So the Swiss government stepped in to arrange a rescue. The government provided some liquidity and arranged for UBS, its rival, to take over Credit Suisse’s business.
There were some other tremors in the U.S. market. There was a run on Signature Bank in New York. Silvergate Bank was the bank of many crypto firms—same deal. They were both liquidated. Signature Bank was the third-biggest bank failure in U.S. history. A couple others teetered on the edge but survived.
It appears—appears!—to be over. But this was almost a textbook example of how banking is a delicate confidence game that can be shaken by unpredictable events.
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I didn’t mean for Lesson 540 to be a preview of what was to come! But it did turn out to be timely.
Hey listen, I need your help with something. You may or may not have noticed that I’m not the biggest Instagram user. And for a long time, we just posted graphics of lessons and didn’t pay much attention to our Instagram account here at Plain English.
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Follow the account, like the posts you like the most, and leave comments. And we’ll create more posts based on the feedback you give us. So make sure to do that—leave comments, react to the stories, send messages—I check it every day, so I’m looking forward to seeing you on Instagram, @plainenglishpod .
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