On Wednesday, March 8th, the biggest bank run since the financial crisis occurred. But what exactly is a bank run and how will this impact the economy?

Bank runs date back to the advent of the bank and it occurs when people fear that they might not be able to get their money out of the bank, so all customers collectively pull their money from the bank, forcing it to go out of business. One of the largest and most famous bank runs was that of Bear Stearns in 2008. The company had overinvested in toxic assets and, when everything hit the fan, customers flocked to the bank to try to get their money out. The $20 billion dollar company went belly up and consumers lost big because of the company’s poor decisions.

Silicon Valley Bank (SVB)  just had something eerily similar occur on Wednesday. The company had purchased poor assets during the start of COVID and bought bonds with low-interest rates that matured just recently. The market got wind of the poor investments and hedge fund manager Peter Thiel began to pull money out of the bank along with the members of his Founders Fund. They pulled millions and signaled to the market to begin pulling their assets out of the bank too. 

This started the bank run. Clients at Silicon Valley Bank began taking money out by the millions. Within the day, the stock price of SVB dropped nearly 50% and continued to drop throughout the week. As part of Federal Deposit Insurance Corporation (FDIC) insurance, customers of the bank would be insured up to $250,000 if the bank went under. 

However, many of the bank’s clients were businesses or venture capital firms, meaning that they had millions of dollars in the bank that wouldn’t be insured if the bank went under. Approximately 93%, or $161 billion, was uninsured by the FDIC. So, the FDIC closed the bank on Friday to prevent further damages. They then took control of the bank, creating the National Bank of Santa Clara to hold the deposits, and are currently in the process of appointing new management. 

This loss of confidence by consumers in SVB didn’t only affect one bank though. It’s already having effects on smaller banks around the country. Consumers are quickly flocking towards systemically important banks, or SIBs, which include banks like JP Morgan and other larger banks. Economists are saying that we are going from, “too big to fail” to “too small to succeed” because of this loss in confidence of smaller banks. 

With consumers losing faith in small banks, it’s causing the banks to go out of business themselves. First Republic, PacWest, and Signature bank all had their shares frozen by market operators due to too much volatility in their stocks earlier this week. The banks are facing potential issues in the coming weeks, but economists are looking hopeful. They say that the problems facing SVB are unique to their company alone as many other banks have more diversified balance sheets, so customers shouldn’t worry.

However, gaining back customer confidence is a difficult task after they’ve watched a major bank go nearly belly up. The events of Wednesday are going to have a tremendous impact on the economy in the coming weeks and it will be important to watch to see what will happen. Furthermore, the week of March 13th will bring a new inflation report which will be more information for the Federal Reserve to consider. 

**UPDATE**

The Federal Reserve met on Sunday night and decided to backstop all deposits from Signature Bank and Silicon Valley Bank, both of which were going out of business. This should aid consumers’ worry as they now know that their deposits will be backstopped beyond the FDIC limit of $250,000. However, this is merely a bandaid on a gaping wound. The problems that Silicon Valley Bank faced are not entirely unique as the Fed kept raising interest rates until something broke, and now we’ve seen something break. This is leading a lot of economists to believe that the Fed might not raise rates this upcoming week to let the dust settle around the bank debacle.