How does a bank go from being worth billions to practically nothing in just a matter of days?
The answer, simply put, is a loss of public confidence.
Forget interest rates, mortgages, and marketing — if people don't trust a bank to keep their money safe, everything else falls apart around that fact.
After all, the only reason we entrust our hard-earned cash to banks is because we're confident that it will be there when we need it. So, what happens when the bank doesn't have all our money?
Banks don't just hold onto the money we deposit with them. They invest it in assets and loan it out to people and businesses. Think home loans or business loans.
That's fine from a legal point of view. You're more than welcome to argue the ethics, but banks do it all the time.
As a system, it serves us well, as long as people have faith in the bank's ability to repay their deposits.
But when that faith dries up? Well, things can quickly unravel if people start to doubt the bank's financial stability. Enter Silicon Valley Bank, which collapsed a little over a week ago.
When some customers attempted to withdraw their deposits, they discovered that the bank didn't have enough cash on hand to meet these requests.
As a result, SVB had to sell off an investment at a loss to raise the necessary funds.
That caused a stir among other customers, who also went to withdraw their money, ultimately leading to a run on the bank and its collapse.
That's just one of a number of ways a bank can fail.
A bank may become insolvent if it owes more money than it owns.
A bank's reputation can also be damaged by fraud or technical glitches, causing people to lose confidence in its ability to protect their deposits.
Sometimes, it's as simple as another, separate bank failing, lowering confidence in the banking system as a whole.
To stop these kinds of failures, regulators can enforce stricter regulations that require banks to hold onto more cash reserves.
It's a pretty good way to make sure banks won't run out of money if too many customers try to withdraw their deposits at once.
New Zealand, for instance, has pretty tight regulations, which helps to reassure people that their money is safe in the hands of local banks.
A lot of that is thanks to how small our banking sector is, with only a few large banks operating in the country.
In contrast, the United States has a much larger and more complex banking sector, with many more banks and financial institutions to oversee.