Any Bank Can Fail; Don’t Panic

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I’ve received more emails and calls from clients on the failure of SVB Bank than I did on the stock market crash in April of 2020. That tells me there is wide concern today about the stability of the economy and financial markets.

When you listen to politicians and pundits discuss the complexity of what went wrong, you can easily zone out. Here is what basically happens with a bank failure.

Banks make money by borrowing from customers in the form of short-term obligations like checking accounts, savings accounts, and certificates of deposit, then loaning that money on longer-term loans to borrowers. A short-term loan normally carries a low-interest rate, providing inexpensive funds that the bank can loan out at a higher rate. The longer the term of the loan, the higher the interest rate the borrower will pay the bank.