Hello, and welcome back to The Breakdown.

Unless you have been living under a rock, you have probably heard about a situation revolving around a bank, specifically Silicon Valley Bank. Now, I am not going to go in depth on what happened, rather what I am going to do is we are going to be breaking down some of the terms around this situation to better help you understand what is going on.

If you're like me, you're familiar with the situation and what happened, but don't fully understand it all because of some of the terminology that has been thrown around, and the functions/reporting of banks. My goal in this issue is to help define in plain english some of the words so you can better understand what actually happened.

This is going to be a boring issue, as it is mainly just definitions, but I think it is important for as many people as possible to understand at a deeper level the events that have gone on in the past week.

If you want to learn the events that lead up to this, you can do a quick google search to find those resources, as at this point there are many places that break down exactly what lead up to where we are now.

So let's break down and simplify some of these terms you may have been hearing to HELP understand the events that happened.

Silicon Valley Bank Closing Terminology

SVB - Silicon Valley Bank, a top 20 bank which collapsed over a 48 hour period going from being worth billions, to being shut down by California regulators. Best known for banking startups and people/companies affiliated with startups.

Depositors - The people who have deposited money into a bank. This can be individuals, businesses, etc. So you are a depositor of whatever bank you bank with

Run on the bank/bank run - A run on the bank is when the people who have their money in the bank (depositors) all come at one time to withdraw the money they have deposited in the bank, typically because they fear they will not be able to get their money back if they don't.

Reserve Requirement - What some people do not understand conceptually about a bank is what they actually do with your money. They know how a bank makes money, but don't realize it is off of their own money they have deposited. A bank does not take in your money, and keep it all in one place. A bank makes money by taking the money that you have deposited, and lending it out to people for which they are paid interest.

So yes, when you take out a mortgage, a personal loan, etc. you theoretically are using other people's money that they have deposited at that institution. That is why you have an interest rate for your accounts as well, the bank is paying you back as a benefit of them lending out your money.

So how is that when you go to take out money, you can just get cash if the bank has lended out your money?

That's because the government mandates the bank to always have a certain amount of cash on hand to be able to give out to their depositors if they do want to withdraw physical cash, this is the reserve requirement. This is usually 10% of the entire bank's demand and checking deposits.

That is why a run on the bank is typically very bad, and can be a self fulfilling prophecy. People fear they won't get their money out, so they go withdraw the money. Eventually, the bank runs out of the money they had on hand, and then people actually cannot withdraw their money. Then people panic more and the panic spreads, and more people now try withdrawing the money. Eventually, all money the bank had is reserves is gone, and all the rest of the deposits are tied up in lending/investments.

So a bank can be totally within the standards and laws of how they are required to operate, but still get screwed when a run on the bank occurs. And to my knowledge, that is what happened with SVB. In terms of reporting and operations, they were not doing anything illegal or wrong, and they still got screwed.

Receivership - This is an action the government can put banks into. When a bank is put into receivership as Silicon Valley Bank was, the government says they are ensuring that all the deposits the people have in the bank, will be received by those people who deposited money with them.

Backstop - Think of backstopping from the government as insurance, saying it is guaranteeing you will get the money you deposited back.

FDIC - FDIC (Federal Deposit Insurance Corporation) is a government "fund" one might say that guarantees you will always be able to get a certain amount of money of your deposits, even if that bank fails in some way. You most likely have FDIC Insurance from your bank up to $250k of your deposits. This means that however much you have deposited, you are guaranteed to get $250k of that if something happens to the bank. It doesn't mean you won't get all of it, it just means you're guaranteed that amount.

Stockholders - Stockholders (may also be called stakeholders) are people who hold a stock/stake in the success of something, most commonly used when speaking about stakeholders in a business. This is employees, executives, literal shareholders if it is a public company, etc. who have an incentive for the business to do well.

Silicon Valley - Silicon Valley generally typically refers to a part of the west coast, mainly San Francisco, and is the hub of startups. If you're reading this newsletter, you probably already know this.

Bonds - A bond is a financial term for saying you are going to give someone your money and tie that money up (meaning you cannot use that amount), and in return that person will pay you back money over a set amount of time in regular intervals.

In the case of Silicon Valley Bank, they were bondholders with the federal government and had a lot of money tied up there. To make matters worse, as interest rates have gone up (the rate that the money will be paid back), those bonds have become worth less, paid back less, and this has spiraled more as startups who bank with SVB have used the money they deposited with SVB towards their operations, of which SVB has to give back as it is spent.

Balance Sheet - A reference to how much someone/something has in assets, offset by its debts and owners equity.

Mark to market - Mark to market is another way of saying valuing one of your assets at it's true market value.

For example, say 10 years ago you bought a house for $100k. Now, over 10 years that house has grown in value to $150k, but you still look at your net worth as it is worth $100k. If you were to "mark that to market", your net worth would be $150k, not $100k because that is the market value.

This is relevant for the bonds and assets that SVB had on their balance sheet, as some were not marked to market, and were actually worth significantly less than what was actually reported, putting SVB in a worse financial situation.

Venture debt - To understand this, first understand basics of what venture capital is. Venture capital is when someone invests in a startup and gives that company money, in exchange for equity/ownership in that startup. This is a highly risky asset class as most startups will go out of business (usually 90%ish).

Venture debt is the same thing, but instead of equity being given in exchange,the startup agrees to pay that money back plus interest. This is something SVB did, and is also very risky because of the nature of lending to risky companies who may go out of business, and you may not get your money back.

Warrants - This is usually also a part of venture debt. We are not talking about "warrants" such as when you get arrested. Warrants are usually in the form of "once you pay back the debt you owe me, I also get the opportunity to buy a little bit of ownership in your business for the risk I took."

So think of it as an added benefit to the risk the lender took.

Contagion - The spread of fear across people/industries in business. This means going from one focus to many focuses and second/third order effects.

In the case of SVB, contagion is the fear that banks beyond SVB also will be in bad shape, and people will not be able to get their money out, causing yet another bank run. This is why it was important for the government to backstop the depositors.

Systemic risk - The act of one domino falling, causing more and more to begin falling. One event triggering many other subsequent events, usually not in a good way. The opposite of unsystemic risk which means one isolated event which has no effect on other events.

Regional banks - Banks that have multiple banks in a region, but are not nationwide. This would not be banks like JPM, Wells, Citi, etc. These banks are smaller.

Bailout - When the government gives financial support to rescue a company that is in financial trouble and possibly at risk for bankruptcy. You often hear of this when people talk about 08/09 and the Great Financial Crisis.

A lot of these terms I needed clarification on myself to understand the situation that was happening, and I hope this helps you too. I know this was more boring and educational, but when I hear of a top 20 bank collapsing, I want to understand the situation as best I can so I can make the best decisions for myself, if any are needed (luckily none, so far).

And that's all for today, if you want to get more follow me on Twitter @Cam_LaChance, where I interact with people and share more thoughts similar to what I write about here.

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💯 Freaking sick dude🤷‍♂️ Meh, do better next time😑 Bruh, I might unsubscribe after reading that