Bank runs
The banks don't have your money.
Let's unpack that
If you've been living under a rock, the US, nay the world, is experiencing a crisis of confidence in the banks. Why is this? To put it simply, they don't have your money.
Banks operate under a system of banking known as "fractional reserve banking." This essentially means that they can operate with very little cash on hand. E.g., if a bank has $100 billion of individuals and businesses money, they would have 15% as a ledger entry at the US Federal Reserve (so not cash) and 0.005% as physical cash. The rest is in less liquid securities and loans.
Sooooo... what's the big deal???
Well the problem is that while banks are NOT insolvent, they are illiquid. And if a run happens they CAN NOT pay you.
To sum it up, Fed printer goes brrr, banks can't hold cash, loan money to the government by buying government debt, Fed increases credit rates, older bills drop in value, banks can no longer cover all depositors, Fed loans money back to insolvent banks.
You may be thinking, "but wait, aren't deposits FDIC insured?" And the answer is... "Yes, sort of. Well, most of them."
You see, some people that have accounts at the bank are high net worth individuals or start-ups with more than the FDIC limit of $250,000.
SVB debacle
This is why Silicon Valley Bank went under... SVB falls under a category of bank that bought bonds from the government before the rate hikes AND have lots of uninsured deposits from startups and the like.
SVB was bailed out by a joint commissioned task force in spite of the fact that MOST of the money was uninsured by the FDIC. This was done to prevent "systemic risk" or contagion.
This had a knock on effect of incentivizing people to move their money from smaller regional banks to larger "too big to fail banks" that would ensure any losses over $250,000 would be covered.
This has driven the price of Bitcoin to go on an absolute tear as people wake up to the fact that your bank has an IOU for you, not actual money.
In the weeds
All of this was actually made worse by the Fed's recent interest hikes. The reason is a bit technical, but goes something like this:
- Banks essentially loan money to the government in return for getting that money back with interest in the future. This is called a treasury bill if matures (pays out) in less than a year, or a bond if it's greater than a year.
- Banks were forced to buy these financial instruments because they are low risk interest yielding products that help to mitigate against the INSANE inflation that QE (money printer go brrr) causes.
- The Fed jacks up rates from almost zero to roughly 4.5 %.
- Suddenly newly minted bonds are much more attractive and profitable than the old ones.
- Now US banks all have massive paper losses (about 250 billion dollars collectively) because the bonds they hold are worth less on the open market (discounted at roughly 20% or so).
- If deposits flow out of the bank, they end up realizing all the paper losses.