We can’t think of a better word than “wild” to describe the last few days. Yes, an Indian production winning an Oscar is wild (and awesome!) but we’re referring to a large American bank freezing its customers’ money. OVERNIGHT.

🤯 What? Can banks do that?

Well, yes and no. Here goes:

Who is Silicon Valley Bank, and what happened?
Silicon Valley Bank, or SVB, is a 40 year old commercial bank that was created to provide banking services to startup communities in California. It quickly became the hot favourite amongst startups both in the US and abroad (like India and China). Beyond traditional banking services like lending and foreign exchange, SVB also provided services like venture capital to address the needs of its primary customer: a startup.

Ok, this sounds great and innovative, but WTF happened last week? Well, in short - the bank collapsed.

Here’s an over simplified explanation - let’s say startup ABC raised 5 million dollars. They deposit most or all of it in their bank account at SVB. SVB can either lend out that money to borrowers, or invest into securities (like government bonds). Since an INSANE amount of capital hit startups from 2019 through 2021, SVB had too much money to lend. And so they put it into government bonds. This is a great strategy while interest rates are low. Over the last year though, the US Fed (their Central Bank) has been increasing interest rates and how! What happens when interest rates increase? The prices of bonds decrease. Now startup ABC is looking to withdraw their money, and when they do so, SVB has to sell those bonds. But now those bonds are much cheaper than what was invested. And this leads to a liquidity crisis. Boom, startup ABC can’t get their funds out. Now, think of this happening at an outrageous scale. With billions in deposits, and billions being withdrawn.

📉 There’s a huge hole.

Why is it such a big deal?

Because many many (many) startups both in the US and abroad had their large deposits being held at SVB. They use this money to run startup operations, pay vendors, pay employee salaries and a whole lot more.

⚰️ Money being stuck could basically lead to premature deaths of these companies, including legal issues.

So how do we deal with such a situation?

Panic, of course. Just kidding. Although that is the first reaction to an absurd situation like this since we take banks for granted - as we should. But there is a greater than zero chance that the bank can go under, taking all your money with it. Luckily, in this situation, SVB got bailed out - i.e, the regulator came in and promised customers they could access all their money. And they did it pretty quickly.

PHEW.

🔫 Startup founders (and other customers) dodged a major bullet there.

What can we take away from this incident?
This is a great lesson in diversification. Have multiple bank accounts, and don’t put all your money into a single one. Nothing is too large to fail these days. Remember YES bank in March 2020? People had their money stuck there for days. In India, your money is insured up to 5 lakhs - which means if you have 15 lakhs in a bank account and the bank fails, you are guaranteed only 5 lakhs back. YIKES! That’s not such a high number.

🦋 Try to spread out your money - some in a couple of banks, some in the markets like in mutual funds, some in gold etc. That way, one thing failing doesn’t mean you are left penniless.

TLDR; DIVERSIFY.