Follow and subscribe to get on my email list for my Medium and WordPress to get updates on my latest writings!

Picture this. You are going to the bank to withdraw your money. You put in your ATM card and press your password. A moment later, a red pop-up message appears warning that the machine cannot dispense the cash you need. You are like, “Ok, let me get to the bank teller and ask what’s up”. When you arrive at the counter, you are greeted by a long line of people. Some are shouting, some are throwing chairs, and some are trying to break into the secured door heading into the offices. 

You ask the next person in line and he said, “Apparently, we can’t withdraw our money. Don’t know what’s happening. I overheard the person in front shouting where’s his money”. You panic a bit and rush to the front, demanding to get your money from the bank. The teller asks everyone to calm down and said that “I am very sorry, everyone but we don’t have your money currently to give back to you. Please exit the bank and we will inform you by email or text messaging of the latest developments”. 

Everyone starts shouting again and banging on the counters, and suddenly, a phone call comes for one of the managers. The manager, with a stressed look, informed all the employees that the bank has went under and they have been laid off. They quickly exited through the back door and left the bank. 

Drastic, I know. But this is the situation that is happening now to Silicon Valley Bank (SVB). In economics, this is called a “bank run”, where everyone worried about the safety of their money, wants to withdraw as much money from the bank. Many of the people who put their money in SVB now face a dire situation where they are unsure whether SVB’s collapse would mean that they can’t withdraw their hard-earned money.

SVB essentially lose a lot of their depositors’ money when they invested them in investments that lost a lot of money (I will brief more on this in the following article later). Now, the regular person on the street, and many companies who saved and invested their money into SVB face a potential loss in all their savings and investments. 

I know some of you may have heard the word “financial contagion” going around in the news about SVB. Let me explain this in simple terms. Imagine you owe about RM100 to Ali, and Ali in turn also owes about RM100 to Ah Chong. This cycle repeats again when Ah Chong also owes RM100 to Ahmad and the list goes on and on. What if I can’t repay Ali? That means Ah Chong, Ahmad, and the rest of the people down the line, cannot repay the money too. This is exactly the worry about SVB. It could lead to “financial contagion” for the other banks in the market.

The banks in the market all lend and borrow from each other. But if one bank goes under and cannot repay, the repercussions are huge as it also means that other banks cannot repay each other also. And if enough banks can’t repay, this means that they might ask you and me to repay our loans prematurely (to cover their loss) and we could be looking at paying off our RM500k loan in one shot if the bank wants it. That in turn, affects the regular person on the street as they are suddenly forced to spend all their savings to pay off the loan. 

From there, with no money to spend, businesses also can’t make enough money and they start going bust. Employees are laid off (you could lose your job and income), and the economy spirals into a vicious recession. Hence, the government is of course worried about this and they will do everything in their power to prevent this from happening.