What happened with the Silicon Valley Bank?

I want first to explain how exactly banks work. The main way banks operate is by giving loans. Banks have many people who create savings accounts with the bank. Then the bank uses the money in these people's savings accounts to make loans. Banks pay the people who make savings accounts with them an interest rate, let's say, for this example, around 1%. The banks also receive money from the loans because the people who got lent the money pay the bank a higher interest rate, let's say, for this example, around 3%. This is how banks make money. When something goes wrong in this process, that's when banks fail, precisely what happened with the silicon valley bank.

When a bank has nobody to lend money to in order to make money, they usually put their money in very predictable and safe bonds so that they can still make money. Many put the money in "set bonds, '' meaning the interest rate and money they receive from these bonds stay the same. The Silicon Valley bank put a lot of their money into these bonds. Remember that the money they put into these bonds is from the customers' savings accounts.

Raising and lowering interest rates is expected as the economy and inflation rates fluctuate. When the interest rates are raised, in this case, the banks have to pay a higher interest rate to their customers with savings accounts, which is what recently happened. So silicon valley bank had to pay a higher interest rate to all its customers. But this is where it all goes wrong; remember, Silicon valley puts a lot of its money into these set bonds, and the interest rates don't change in set bonds. So now the bank is paying more than they receive and losing money.

But it gets even worse. The amount of money in the bonds is not accessible at the flip of the switch, they are put in place for a certain amount of time, and the money cannot be accessed. Remember, this is the people's money that is in these bonds. In the case of silicon valley, the bank could not continue paying these interest rates to their customers because the interest rates were raised. Many of the people with savings accounts took this into account. They realized they needed to withdraw their savings account money because they would lose money if they didn't.

But the problem is that the bank doesn't have these people's money for them to withdraw because their money is in the bonds. So all these people lose most of their money because the bank does not have the money to pay them.

But why was this such a big deal? One of the reasons this is such a big deal is because it was the silicon valley bank. Many people who save their money in these banks are big companies, such as Rakuten. Most people at Silicon Valley bank had savings accounts of over ten million dollars.

This is why the government stepped in because if these big companies lose much money, it will negatively affect the stock market of the United States and the economy. The government realized this and paid back all these companies' lost money. Eventually, in some years, the silicon valley bank will pay back the US government because they will eventually get the money out of those bonds.