{"id":147682,"date":"2023-03-17T00:02:48","date_gmt":"2023-03-17T06:02:48","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=147682"},"modified":"2023-10-09T01:29:38","modified_gmt":"2023-10-09T07:29:38","slug":"on-the-market-87","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/on-the-market-87","title":{"rendered":"SVB&#8217;s Risky Bailout and The Bank Run \u201cDomino Effect\u201d"},"content":{"rendered":"<p>Both<strong> SVB (<\/strong><a href=\"https:\/\/www.biggerpockets.com\/blog\/how-did-svb-collapse-in-48-hours\" target=\"_blank\" rel=\"noopener\"><strong>Silicon Valley Bank<\/strong><\/a><strong>) <\/strong>and <strong>Signature Bank<\/strong> have<strong> crashed and burned dramatically <\/strong>over the past week. What once was a few large customers making withdrawals quickly turned into a <strong>bank run of epic proportions<\/strong>. Within just a few days, SVB went from one of the largest banks in the United States to one of the<strong> biggest bank failures in the nation\u2019s history<\/strong>. But what led to such a fast-paced collapse, and are more banks on the chopping block?<\/p>\n<p>You don\u2019t need to be an expert economist to understand what happened at SVB and Signature Bank this week. But you will want to hear <strong>Dave Meyer\u2019s take on what could come next<\/strong>. With <strong>bailouts <\/strong>back on the table, many Americans fear we\u2019re on the edge of a<strong> total financial collapse<\/strong>, mirroring what unfolded in 2008. With more and more Americans going on cash grabs, trying to keep their wealth safe from the<strong> \u201cdomino effect\u201d of bank failures<\/strong>, what should everyday investors prepare for?<\/p>\n<p>More specifically, for our beloved real estate investors,<strong> how could SVB\u2019s failure affect the housing market?<\/strong> Will the <a href=\"https:\/\/www.biggerpockets.com\/blog\/the-fed-wants-a-housing-correction\" target=\"_blank\" rel=\"noopener\"><strong>Federal Reserve<\/strong><\/a> finally be forced to <strong>end its aggressive rate hikes<\/strong>? Could money flood into real estate as hard assets become more attractive? Stick around as Dave explains this week\u2019s wild events and what it could mean for the future of the <a href=\"https:\/\/www.biggerpockets.com\/blog\/10-charts-that-summarize-the-us-economy\" target=\"_blank\" rel=\"noopener\">US economy<\/a>.<\/p>\n<p><a href=\"https:\/\/podcasts.apple.com\/us\/podcast\/on-the-market\/id1615086704\" target=\"_blank\" rel=\"noopener noreferrer\">Click here to listen on Apple Podcasts.<\/a><\/p>\n<h2>Listen to the Podcast Here<\/h2>\n<p><iframe loading=\"lazy\" src=\"https:\/\/playlist.megaphone.fm\/?e=BIGPOC3315869878\" width=\"100%\" height=\"200\" frameborder=\"0\" scrolling=\"no\"><\/iframe><\/p>\n<h2>Read the Transcript Here<\/h2>\n<div style=\"overflow-y: scroll; max-height: 400px; background: #eee; padding: 20px; border: 1px solid #ddd;\">\n<p>Dave:<br \/>\nHey, everyone. It&#8217;s Dave. Welcome to On the Market. Today we have a special episode for you. We actually had a different show entirely scheduled, but as you probably know, there has been a lot of crisis and activity in the finance and banking world, and we wanted to provide some context as information to all of you as soon as possible.<br \/>\nSo that is what we&#8217;re going to do today. I&#8217;m going to discuss what has happened in the banking system over the last couple of weeks. We&#8217;re going to go into how and why this happened. I&#8217;m going to discuss some policy changes the government has implemented to address the issue. And, of course, I&#8217;ll give some thoughts on what this might all mean for the real estate investing world. So that&#8217;s what we&#8217;re going to do.<br \/>\nBut just remember, I am recording this a few days prior to you listening to it. I&#8217;m recording it on Tuesday, March 14th, with the information I have right now at the time, but this story is, of course, still developing. That&#8217;s it.<br \/>\nThe context and background will remain true going forward, and that&#8217;s what we&#8217;re going to focus on mostly today, but remember that, given that this story is evolving and will likely keep unfolding for at least the next couple of weeks, probably more, you should be keeping an eye out for updates, which we will be providing to you on the BiggerPockets blog, our YouTube channels, podcasts.<br \/>\nAnd if you want realtime updates, you can follow me on Instagram, where I&#8217;m @thedatadeli, and I put out information about this stuff all the time. So we&#8217;re going to get into this whole situation in just a minute, but first, we&#8217;re going to take a quick break.<br \/>\nLet&#8217;s first start with just going over what has actually happened and how this whole financial banking crisis, bank collapse started just a couple of days ago. So basically, the first signs that most of the public at least got that something was wrong was back on March 8th when the country&#8217;s 16th largest bank, Silicon Valley Bank, everyone knows this name now, showed some concerning signs.<br \/>\nAnd just in three days, from March 8th to March 10th, those quick three days, the bank had been taken over by federal regulators for insolvency fears. And this was really startling both to the size of the bank that collapsed and the speed of the collapse. Three days is quick for any institution to go down, but it&#8217;s kind of even crazier for a bank that had over $200 billion in assets. And also, this constitutes the second-biggest collapse of a bank in US history and by far the biggest bank collapse since Washington Mutual folded back in 2008.<br \/>\nSo this collapse of Silicon Valley Bank, everyone has heard of it now, but it is not the only thing that has happened over the last couple of weeks. Since last Friday, March 10th, federal regulators have stepped in and took over another bank, Signature Bank, due to similar concerns about insolvency. And Signature Bank is smaller, but it&#8217;s still pretty big. It has over a hundred billion dollars in assets. So still a pretty significant situation.<br \/>\nAnd I should just say, right at the top here, big failures are not a normal occurrence. These are really significant events. So the fact that two of them have happened in just a couple of days is really remarkable and why we&#8217;re talking about this today.<br \/>\nSo we saw that over the last weekend, and then, on Sunday, we also saw some other interventions from the government that were intended to stabilize the situation, which, at least for the time of this recording, have calmed fears at least for the very minute. But still, financial stocks are getting hammered, and there is just a lot of rightful fear about the banking system and financial system that is persisting right now.<br \/>\nSo that is just sort of a high-level overview of what has happened so far and what we know. Silicon Valley Bank collapsed. Signature Bank collapsed. We&#8217;ve seen the government step in. So that&#8217;s at the highest level if you didn&#8217;t already know that what has happened.<br \/>\nBut to really understand this issue and to understand what might happen, we need to get to the root causes and explain some of the background information. So in order to do that, I&#8217;m going to talk about some of the details, about what has happened, how the government is responding, and that will help us all get&#8230; By the end of this podcast, help us understand what this might mean for the economy and the housing market in general.<br \/>\nThe first thing we need to do to fully understand the situation is to just take a step back and talk for a second about the business model of banks and how banks work. And if you&#8217;re familiar with the financial system, this may seem obvious to you, but it is worth reviewing, I think, because the details here matter.<br \/>\nYou probably know this, but at the most basic sense, banks take in deposits from people like you and me or businesses. This is normally&#8230; If you go to your local branch, you can just go, take your money, and deposit it in a bank, and they will keep it safe for you. They will probably pay you some interest for keeping it at the bank, and then banks go and lend out that money for a profit.<br \/>\nSo when you go and put your hundred dollars in the bank, it&#8217;s not like the bank is just keeping that hundred dollars in a vault somewhere. They&#8217;re going out and taking your money and lending it out to someone else. And they can do this in a lot of different ways. They can lend it out as a mortgage. That&#8217;s very common. Probably, investors here are familiar with that. You can lend it out as a HELOC, a small business loan.<br \/>\nAnd as relevant to this story, you could also lend it to the government in the form of government bonds. Buying a Treasury bill, buying a government bond is essentially just loaning the US government money for some exchange of interest. So that is basically how banks work.<br \/>\nBut in order to ensure that banks don&#8217;t get too aggressive or start lending out money too recklessly, federal regulators require that banks keep a certain amount of deposits in the bank as, quote, unquote &#8220;reserves.&#8221; Basically, they can&#8217;t lend out every single dollar they take in as a deposit. Usually, they&#8217;re required to keep about 10% of all the deposits that they have in reserves.<br \/>\nSo most of the time, this works. People don&#8217;t just normally, in normal times, all run to the bank at the same time, and they&#8217;re like, &#8220;We want our money right now.&#8221; So this 10% reserve system, the vast majority of the time, works.<br \/>\nSo if the banks are only required to keep 10% of their deposits on hand, but then, say, 20% or 30% or 40% of people come, and they say, &#8220;We want to take all of our deposits out,&#8221; the bank won&#8217;t have enough money for everyone who wants to make those withdrawals, and the bank can fail.<br \/>\nAnd this underscores something that is just sort of an unfortunate reality about the banking system in the US and really in most of the world is that the banking is sort of this confidence game. It works because people believe in it, and they believe that when they go to the bank, and they want to take out the money that they are saving there, that it is going to be there.<br \/>\nBut if people lose confidence in the banking system, it can be a very serious, dangerous situation. That&#8217;s sort of where we find ourselves right now. And normally, the feds, federal regulators understand that this is a dangerous situation. They don&#8217;t want&#8230; They are well aware that bank runs are really bad, and as we&#8217;re going to talk about, they can spread a lot.<br \/>\nAnd so, federal banking regulators do have protections. They have authority in the US to prevent bank runs and to stabilize the financial system in times of crisis or panic. And so that is sort of the context you need to understand what has happened to SVB, Silicon Valley Bank called SVB.<br \/>\nSo now that we understand this sort of context and sort of what&#8217;s going on and how banks can fail, let&#8217;s just dive into what actually happened with Silicon Valley Bank.<br \/>\nSo Silicon Valley Bank is very concentrated in the tech sectors. It&#8217;s not really a bank that works with normal customers. Not a lot of people just have their normal savings and deposits accounts there. It is highly concentrated with companies, so that is important to know.<br \/>\nBut it&#8217;s also highly concentrated with a certain type of companies, tech companies, and even within tech companies, it&#8217;s a lot of startups, early-stage companies, and the investors who fund those startups, which are typically venture capital firms. If you&#8217;re not familiar with tech, venture capital is a type of investment that really focuses on high-growth companies, high-potential growth companies like tech startups.<br \/>\nAnd this is important because, during the pandemic, these types of companies, the specific types of firms that Silicon Valley Bank&#8230; Sort of their niche. They absolutely boomed, and deposits at Silicon Valley Bank grew like crazy because of this.<br \/>\nIn 2021, the total deposits at SVB grew 86%. That is startling, and I think we all probably know why this happened, right? There was a lot of money flying around in 2020, 2022, 2021, all of them, and a lot of them&#8230; Venture capital firms were raising a lot of money from their investors, and tech companies were raising huge amounts of money.<br \/>\nSo if you&#8217;re a tech company, a high-growth tech company, for example, and let&#8217;s just say you raise 10 million to start growing your company, you obviously don&#8217;t need all $10 million of that all at once. And so you put a lot of it, let&#8217;s say $9.5 million, in the bank. And a lot of these tech companies chose to do that at Silicon Valley Bank. And that is why deposits at Silicon Valley Bank grew so much, 86% in just 2021. So the bank exploded during these years.<br \/>\nNow, the bank, SVB, had a lot of deposits, and they want to earn money on it. That is, as we discussed, the banks&#8217; business model. They take their deposits they rent, and they lend it out to other people for a profit. And so the bank wanted to earn a return on these deposits.<br \/>\nAnd the way they did it with a lot of these deposits, it&#8217;s they put money into US Treasurys. This is a government bond, basically. It&#8217;s as vanilla of an investment as you can make. And bonds, generally speaking, are very safe investments because the US government to date has never defaulted on a bond payment. If you buy a bond from the US government, and they say that they&#8217;re going to pay you 2% per year on your money, they so far in history have always done that. And so, when SVB bought these bonds, they were thinking, &#8220;Okay, that is probably a pretty safe bet.&#8221;<br \/>\nAnd this was all well and good until the Fed started raising interest rates, as we all know, about a year ago. And the rising interest rates impact this story in a couple of different ways.<br \/>\nThe first way is that the tech sector has been absolutely hammered. If you own any stocks, if you invest in the stock market at all, you are probably very familiar with the fact that tech stocks, even the biggest ones, even the most reputable ones, have been getting crushed over the last couple of years more than really any other part of the stock market, generally speaking.<br \/>\nThe other thing is that funding for startups has dried up. Those venture capital companies that invest in startups, they&#8217;re still making some investments but not as willy-nilly. The capital is not free-flowing to startups in the way that it was over the last couple of years. They&#8217;re tightening their belts a little bit because credit is getting harder to find, and so there&#8217;s less money flown to startups, which means that SVB is getting fewer and fewer deposits.<br \/>\nThe other thing that impacts this is that because these startups were getting less money, and their stocks are getting hammered, and all these things, it means that these startups were burning through their cash faster than expected.<br \/>\nSo remember that example I used when I said a tech company was keeping $9.5 million in the bank? Well, normally, they do that, but because of these adverse conditions that exist for a lot of these tech companies, they need the money. They&#8217;re using the money. They&#8217;re actually going out and spending the money that they raised from investors just to maintain their normal operations. They need to make payroll. They need to buy products, whatever it is. They are just using the money as they normally would.<br \/>\nBut that has, obviously, an impact on Silicon Valley Bank. And the impact is that all these withdrawals meant that they had less deposits. They saw this huge spike in deposits during the pandemic. And since interest rates have been going up, their deposits have gone down.<br \/>\nAnd you can see this in some of their reporting. They&#8217;re a publicly traded company, so you can see a lot of their financial documents. And you can see that towards the end of 2022, SVB went from net inflows, meaning they were getting more deposits than they were lending out, to net outflows. Then this started at the end of 2022.<br \/>\nSo that is the first way that rising interest rates affected SVB. They were just getting less deposits. People were using the money they deposited there. They had less money.<br \/>\nThe second thing is that the value of those bonds that we talked about&#8230; Remember, we said they used a lot of that money that they had from deposits to go out and buy US government bonds. But rising interest rate has an impact on the value of those bonds.<br \/>\nSo when you go and buy a bond, let&#8217;s say it&#8217;s a hundred dollars, you buy a bond for a hundred bucks, there is something called a yield, and that is the interest rate that you earn on that money. So during the pandemic years, if you went and bought, say, a 10-year dated US Treasury bond&#8230; It means if you hold the bond for 10 years, they&#8217;re going to pay you, let&#8217;s say, 2% per year. Yields were between 1% and 2% for most of the pandemic years, which is really, really low, and that is really important.<br \/>\nSo that was fine. They went out and did this, and they were saying, &#8220;Okay, great. We&#8217;re going to get these really safe 1% to 2% returns from the government,&#8221; but they made a decision that is going to come back and haunt them in the story. It&#8217;s that they bought long-dated bonds, so they bought these bonds that don&#8217;t mature for 10 years, let&#8217;s say.<br \/>\nAnd so they are stuck with these bonds that have yields of 1% to 2%. And if interest rates remain low and bond yields stay the same, that can be fine. But when interest rates rise, it decreases the value of those lower-yield bonds. So since interest rates have gone up, bond yields&#8230; They were 1% to 2% during the pandemic. They are now, as of this recording, somewhere between 3% or 4%.<br \/>\nAnd so, if you&#8217;re Silicon Valley Bank, and you need to raise money because you have less deposits, and you&#8217;re thinking, &#8220;I&#8217;m going to go out and sell my bonds to make sure that I have enough reserves to cover the declining deposits that we have. I&#8217;m going to go sell my bonds.&#8221; Not many people want to buy those 1% to 2% yield bonds, right?<br \/>\nBecause if I&#8217;m a bond investor, and I can buy Silicon Valley Bank&#8217;s bonds that yield 1% to 2%, or I can go and just participate in a Treasury auction, or I can go out on the market right now and buy a bond that yields 3% to 4%, I&#8217;m going to do that, right? I&#8217;m going to go out and buy the bond that has a better yield because it gives me better returns. It&#8217;s not really rocket science.<br \/>\nSo the only way that Silicon Valley Bank can sell their bonds that are worth 1% to 2% is by discounting them. So again, let&#8217;s just use the example. If they bought, let&#8217;s say, a hundred dollars worth of bonds at 1% to 2% yields, the only way they can sell them on the secondary market is by heavily discounting them. And they might only make $70 to $80, let&#8217;s say, on that hundred dollars. So they&#8217;re taking a pretty big loss on all of those bonds, and that is obviously not good for the bank.<br \/>\nI just want to be clear that the bonds that they bought were still safe assets. Again, the US government has not, to date, defaulted on a bond. This selling, changing values of bonds is very common. Bonds are bought and sold all the time.<br \/>\nThe issue was not that Silicon Valley Bank was not getting paid on their bonds. They were getting paid on their bonds. The issue is that their declining deposits mean they had to raise cash in order to cover their reserves. And when they went to raise cash by selling bonds, they were taking a loss, and so they weren&#8217;t able to raise sufficient cash in order to cover their reserves.<br \/>\nSo because of these two things, the lower bond values and the fast withdrawals, SVB needed outside capital. They didn&#8217;t have enough inside. And so they went to Goldman Sachs last week to raise more money. The idea was, &#8220;We&#8217;re going to sell some extra stock, probably to some private equity investors, and that&#8217;s going to get us the reserves that we need. We&#8217;re going to have some money to maintain operations, and everything&#8217;s going to be great.&#8221;<br \/>\nUnfortunately for them, that didn&#8217;t happen quick enough. Moody&#8217;s Analytics, which is a credit rating agency&#8230; We&#8217;ve had guests from their show&#8230; Of their firm on On the Market several times. Different parts of the business. We&#8217;ve had people from Moody&#8217;s commercial real estate. The credit-rated agency is very different.<br \/>\nBut Moody&#8217;s Analytics credit rating informed Silicon Valley Bank that they were going to downgrade the bank&#8217;s credit rating. They couldn&#8217;t pull off the private equity thing fast enough. That really is when all of the chaos started.<br \/>\nBasically, Silicon Valley Bank was worried that the downgrading in their credit would spook investors even more than the private stock sale. So they wound up announcing the planned sale, but Moody&#8217;s downgraded them anyway, and that&#8217;s when things really just started to get bad.<br \/>\nThe following day, basically, investors were seeing this, and they were very worried. They weren&#8217;t able to raise the money in time from outside investors. They were getting downgraded by Moody&#8217;s. And the stock just absolutely tanked. The CEO, of course, came on to try and reassure people, but it just absolutely did not work.<br \/>\nSo that&#8217;s when people really started to panic, and venture capital firms and startups alike started to pull their money out of the bank. And this happened really quickly, and I think it&#8217;s due to sort of the nature of startups and venture capital. But basically, a huge amount of their customers rushed to withdraw their money because they were worried that if there was a bank run, that SVB wouldn&#8217;t have enough money for everyone to go around. And so they wanted to be the first people to go take their money out while SVB still had some liquidity.<br \/>\nAnd that&#8217;s how a bank run starts. Basically, everyone&#8217;s like, &#8220;Oh shoot, I need to be the first one there.&#8221; And so everyone rushes to pull their money out. And as you know, most banks don&#8217;t have enough money on hand to handle those situations.<br \/>\nAnd I think that the particular details about Silicon Valley Bank&#8230; And this is important for understanding if and when&#8230; If this is going to spread to other banks. There are some specifics about Silicon Valley Bank that made this situation unique.<br \/>\nAnd to explain this, I need to just remind everyone that when you put your money in the banks, it is not guaranteed. It is guaranteed to a point, up to $250,000, but that is it. So when you go and deposit your money in the bank, the Federal Deposit Insurance Corporation, the FDIC, which is a federal regulator, guarantees your money. It provides insurance for you, basically, up to $250,000.<br \/>\nAnd that&#8217;s great because for most people, most normal people&#8230; You know, you don&#8217;t have a bank account with more than $250,000 in cash just lying around. But as we talked about, at Silicon Valley Bank, most of their customers are businesses. And so, businesses do have bank accounts where there is a lot more than $250,000 in the bank. And that means Silicon Valley Bank had a very unique situation where a huge, huge proportion of their money was uninsured. And so that makes people extra panicked.<br \/>\nJust for some reference point, the average bank, the average bank has about 50% of their deposits are insured by the FDIC. So that makes those people feel pretty good. Silicon Valley Bank, on the other hand, 86% of their deposits were uninsured. And so you can see from this situation how panic might have ensued really, really quickly, right?<br \/>\nBecause all of these startups and venture capital firms are saying, &#8220;Oh my god, Silicon Valley Bank is not doing well, and 86% of our deposits are not insured. So if we don&#8217;t get our money out, there is a good chance that we won&#8217;t ever see that money again.&#8221; And that is why people started rushing to pull their money out of the bank.<br \/>\nAnd on Thursday, March 9th alone, customers tried to withdraw $42 billion from Silicon Valley Bank, which is about a quarter of the bank&#8217;s deposit. And that was just in a single day.<br \/>\nI think the other thing that is really notable about the particulars of Silicon Valley Bank is the relationship between startups and venture capital firms. So if you&#8217;re unfamiliar with this part of the economy, startups raise money from venture capital firms. Investing in startups is a relatively risky thing to do. And venture capital firms, generally speaking, remain pretty closely involved in at least the big decisions that go on at the startups that they invest in.<br \/>\nAnd what we saw on Wednesday and Thursday of last week is that venture capital firms saw what was going on with Silicon Valley Bank, and they sent out emails to the executives at all of these startups saying, &#8220;Pull your money out now.&#8221; I&#8217;ve actually seen some of these emails, and it&#8217;s pretty dramatic. These investors are saying like, &#8220;Wow, all of these deposits, 86% of these deposits are uninsured, and these are companies that we&#8217;ve funded, and they&#8217;re at risk of losing a lot, a lot of their money, so we have to warn them.&#8221;<br \/>\nAnd so venture capital firms all over the country sent out emails to their executives being like, &#8220;Take out your money as quickly as you can.&#8221; And so that obviously also contributed to why the bank run at SVB was so dramatic.<br \/>\nAgain, those two reasons are one, because a high proportion of the deposits at SVB were uninsured. The second is because if a couple dozen of venture capital firms send out a few emails, the potential for billions and billions of dollars to try to be withdrawn is real. And obviously, we know that that&#8217;s what happened.<br \/>\nSo that&#8217;s what happened on Thursday. And then, on Friday, because this huge bank run happened, we saw that the FDIC, which is again a regulatory agency, stepped in to take over the bank. And they did this because, as we talked about sort of at the beginning, bank runs are basically a cycle.<br \/>\nBanks are somewhat of a confidence gain. They work when people believe in them. But if the entire US country said, &#8220;Oh my god, Silicon Valley Bank just collapsed. What, is my bank going to collapse? Or is my local bank not doing well?&#8221; Because if people across the country start to fear that, they might take their money out of their local bank, causing another bank to collapse.<br \/>\nAnd so the government stepped in to basically say, &#8220;We&#8217;re taking control of this situation. We want to prevent any fear. We want to prevent any more banks from failing.&#8221; So that&#8217;s where we&#8217;re at as of March 9th.<br \/>\nAnd over the weekend, people really didn&#8217;t know what was going to happen. We didn&#8217;t really know if the $150 billion of uninsured deposits were going to be recovered. I have some friends who work in this industry, and they were really, really worried about whether they were going to be able to operate over the next couple of weeks.<br \/>\nBut the government basically stepped in on Sunday the 12th to reassure markets, to reassure investors, to reassure just Americans about the state of the banking system. And they did three things.<br \/>\nThe first thing they did was the FDIC took over a second bank, which we talked about at the top, Signature Bank. It has a lot of ties to the crypto industry. It&#8217;s about half as big as SVB, with a hundred billion dollars in assets. But again, anytime a bank fails is a very significant thing. So the fact that it&#8217;s smaller than SVB, sure, it is notable, but the fact that a second bank failed is super, super important.<br \/>\nThe second thing is that the FDIC said that it would guarantee all deposits from both Signature and SVB. And this is really notable because, like I said, normally, a lot, the majority of the deposits in these two banks were uninsured. But the FDIC basically came in, and they said, &#8220;You know what? Everyone should get their money out. We are going to make everyone whole.&#8221;<br \/>\nAnd obviously, the idea here is to help people not worry. All these startups that were worried about making payroll, now they don&#8217;t have to worry about it as much. All these people who were banking at other small banks and worried about their uninsured deposits, now they can go and see that the feds sort of have this situation, they have it in mind, and they&#8217;re making people whole.<br \/>\nAnd although this smells a lot like a bank bailout, the Fed at least is saying that it&#8217;s not because it&#8217;s not protecting the bond holders or stockholders in Silicon Valley Bank or Signature Bank. The people who own stock in those companies or bonds from those companies are probably going to get wiped out. What they are doing is helping out the customers of Silicon Valley Bank. Again, it&#8217;s the depositors who are getting their money out and ensuring that they get all of their money back.<br \/>\nAnd it might not be called a bailout. They are saying it&#8217;s not a bailout, but it&#8217;s definitely bailout-esque. And so, obviously, the government is changing policy a little bit. This used to be that these deposits were uninsured, and now they are ensuring them. And we&#8217;ll talk about this in just a minute, but I want to get to the third thing that the government did.<br \/>\nThe third thing the Fed did was loosen the rules around accessing reserves so other banks won&#8217;t face the same issues that SVB did. So if another bank needs money for reserves or a lot of people request withdrawals, the Fed is basically like, &#8220;We&#8217;ll lend you the money just so that there&#8217;s no liquidity crisis, there&#8217;s no insolvency, that you can maintain your reserves, all of those things.&#8221; So that is basically what happened on Sunday.<br \/>\nAnd these actions taken together were meant to calm investors and the general public alike because, as I&#8217;ve said a few times now, if people are afraid that smaller banks will fail, it could be this sort of self-fulfilling prophecy. People are afraid of a bank becoming insolvent, they move all their money to a bigger bank, and thus, they make the first bank insolvent. So there was risk that happened.<br \/>\nAnd as of Tuesday, when I&#8217;m recording this, that hasn&#8217;t happened. So hopefully, this government action will have stopped this crisis, but frankly, it&#8217;s probably going to keep playing out over the next couple of weeks. But so far, that is what we know.<br \/>\nThat brings us to the last question. What happens from here? And, of course, this is a developing story. Something is probably going to change from when I am recording this on Tuesday from when we are releasing this, but let me just share a few thoughts with you about what is going on.<br \/>\nThe first thing is that the banking system, you probably know this, is very complex and interconnected. Right now, the problems do seem to be isolated to smaller banks, mostly working with businesses, like SVB and Signature. These banks were hit particularly hard by rising interest rates.<br \/>\nAnd from what I can see at least, the big banks like Chase and Bank of America, and Wells Fargo, they don&#8217;t appear to share a lot of the same risks as these other banks do right now. So that is good because if those mega banks start to see problems, then we&#8217;re all in a lot of trouble. But right now, as of this recording, it doesn&#8217;t look like those huge banks are in trouble.<br \/>\nBut there is, of course, still risk, and I&#8217;ve said this a few times, but I just want to reiterate this. A lot of the risk comes from people and fear, not from the banks&#8217; balance sheets or anything at all, right? These situations are really hard to predict because bank runs are more about depositor psychology and what people do when in times of fear and panic, not necessarily about the balance sheets of banks.<br \/>\nI just want to remind everyone that when SVB started to go downhill, they were meeting all the federal regulations. So it really was all these people&#8217;s reaction to what was going on at the bank that caused the bank run and failure. It wasn&#8217;t necessarily&#8230; I mean, don&#8217;t get me wrong, Silicon Valley Bank made a lot of mistakes, but the thing that was the catalyst for them failing was not the mistakes that they made a few months or years ago. It was the reaction of the depositors about learning of these things.<br \/>\nSo that&#8217;s why it&#8217;s super hard to predict because we could look at the balance sheet of all these banks and be like, &#8220;Okay, they&#8217;re in pretty good shape,&#8221; but if people panic and something crazy happens, then it&#8217;s really hard to say what will happen. So I think that is something to just keep an eye on and think about as this is going on.<br \/>\nAnd this idea behind psychology and people really needing to maintain confidence in the banking system is why the government intervention existed in the first place, right? I&#8217;m not an expert in the banking system to know if these specific actions, the three things I just said&#8230; They seem reasonable to me, but I&#8217;m not an expert. I don&#8217;t know if their actions are going to be the right thing to do. But I think it was important that they do something to ensure that the bank run did not spread. That would be disastrous. If there was this cascading effect of banks failing, that would be horrible for the entire country.<br \/>\nSo again, I just don&#8217;t know if these are the right things to do. Obviously, I&#8217;m not a huge fan of bailouts, but I do think it was important that the government do something to stop spreading the fear because, to me, the worst possible outcome, again, is if people across the US start to panic. That starts a bigger bank run, causing a domino effect where tons of small banks fail, credit dries up, the economy is deeply and severely impacted. And to me, that needs to be avoided. And again, I really don&#8217;t know if the specific interventions the government used are the best choice, but I&#8217;m glad that they seem to have stabilized things, at least for now.<br \/>\nThird thing is, as this relates to real estate, I think it&#8217;s really too&#8230; A little bit too early to tell. The failures so far are localized in tech and crypto in many ways. These banks aren&#8217;t really real estate lenders. Silicon Valley basically had no exposure to real estate. Signature Bank, from what I understand, did have some exposure to real estate lending, but the problems so far are not really in the specific area of lending in real estate.<br \/>\nI just want to reiterate that the problems that have arisen of far aren&#8217;t due to bad loans. They are for sure due to bad business decisions, but not because the people that SVB or Signature were lending to were defaulting on their loans. That is not what is happening, and therefore, it is a key difference from what happened in 2008.<br \/>\nAnd I know these bank failures, financial crisis brings up a lot of issues with 2008, and there is good reason to be afraid about a broader financial collapse, but this is a key difference between now and 2008, at least so far, that it&#8217;s not because borrowers are defaulting. It&#8217;s because of business decisions that these banks made.<br \/>\nThat said, I do think a few things could happen we should at least talk about in terms of the real estate space. The first thing is that credit could tighten. With banks on edge, they could look to reduce their overall risk and tighten lending.<br \/>\nThis would probably put some downward pressure on real estate, especially, I think, in commercial lending, where credit would likely tighten more than in residential. Because in residential, as you probably know, there are big government-backed entities like Fannie and Freddie, and those things exist basically to keep the credit flowing. So if credit does tighten, I think it will disproportionately impact commercial more than residential.<br \/>\nNow, if there are more bank failures or there&#8217;s any sort of bank run in other industries, credit will probably tighten more across the board. But if we&#8217;re lucky, and the big dominoes have fallen already, then credit and real estate shouldn&#8217;t be too heavily impacted. At least, that&#8217;s my thinking right now.<br \/>\nThe third thing here is that we also have to think about the future of banking regulations that might stem from this, and there might be tighter credit just generally in the future. Because the crazy thing about all of this is that SVB, again, was meeting regulations just a couple of weeks ago, and then, three days later, it was insolvent.<br \/>\nSo clearly, there are a lot of regulations around banks, but none of them prevented this. So it will be interesting to see what, if any, policies change and if credit standards have to change at banks after this. So that&#8217;s sort of what I&#8217;m thinking about credit.<br \/>\nThe second thing here is Fed policy, and I think this is one that&#8217;s going to be really fascinating. We&#8217;ve been saying for a while on this show that the Fed is going to raise interest rates until something breaks.<br \/>\nA lot of people, including me, I admit it, have been assuming the thing that would break first is the labor market, and we see mass&#8230; An increase in layoffs. But we have found something that broke, and that is the banking system.<br \/>\nSo it&#8217;s going to be really interesting to see if the Fed looks at this situation and says, &#8220;Man, we didn&#8217;t directly cause the situation, but these banking crises are indirectly caused by our interest rate hikes.&#8221; And maybe that will give them reason to pause. I mean, the Fed has to be super concerned about a financial crisis right now, and that could cause them to pump the brakes.<br \/>\nThe other thing is that today, on the 14th of March, the CPI dropped again down from 6.4% year-over-year to 6% year-over-year. Core CPI also dropped just a tiny amount, from 5.5% to 5.4%. So it&#8217;s not some amazing inflation print, but the slow and steady retreat of inflation has continued, and maybe that is another reason that the Fed might reconsider their super aggressive stance on raising interest rates too high.<br \/>\nObviously, I mean, inflation is still too high for the Fed or anyone&#8217;s liking, but now they have more things to think about than just unemployment and inflation. They have the stability of the financial system to consider as well. And so it&#8217;s going to be really interesting to watch Fed policy over the next couple of weeks. I think most of us who watch this kind of stuff have been thinking, &#8220;Yeah, for sure, they&#8217;re going to raise rates in March and maybe through a couple more months of this year.&#8221; Now I&#8217;m not as sure, and we&#8217;re going to have to keep and hear what they have to say.<br \/>\nThe other thing, the third thing, other than credit and Fed policy, I think is important to look at here is mortgage rates. As the financial system faces fear, bonds are seeing an absolutely huge rally right now. Bond yields were going up to about 4% before all this SVB stuff happened. Now they&#8217;re down to about 3.5%. And this happens because investors are basically taking their money out of maybe financial stocks or even out of the banks and putting them into Treasurys because bonds are safer.<br \/>\nAnd again, yes, Silicon Valley Bank did take some losses because they bought some bad bonds, but it wasn&#8217;t because the bonds weren&#8217;t paying off. The bonds, if you buy them, are still a really good bet that they are going to be paid off. And so people, investors around the world, seeing all this uncertainty, are pouring money into bonds because they see it as a really safe investment during this time of uncertainty.<br \/>\nWhen demand for bonds go up, yields fall. And that&#8217;s what we&#8217;ve seen. We&#8217;ve seen sort of this historic rally in bonds where yields have come down half a percentage in just a couple of days. And when bond yields fall, like the yield on a 10-year Treasury falls like it has, so do mortgage rates.<br \/>\nAnd so, on Monday the 14th, we saw bond yields move down sharply, and you should probably expect mortgage rates to come down a bit accordingly. And especially with the inflation print that wasn&#8217;t great, but it wasn&#8217;t terrible at the same time, mortgage rates are probably going to come down in the next week or two from where they had been in the beginning of March.<br \/>\nThe last thing, and I really don&#8217;t have any evidence of this, is just the last thing to think about here is, will this whole situation increase demand for hard assets? So people are keeping their money in banks. Banks are looking a little wobbly right now. And so curious if people are going to take their money from banks, maybe if they have uninsured deposits and instead of keeping them in the bank, put them into things like Bitcoin and gold.<br \/>\nJust over the last couple of days, we have seen the price of Bitcoin and gold surge because it seems like people are doing exactly this. They&#8217;re taking maybe uninsured deposits or money that they would normally have in financial stocks and put them into some of these hard assets.<br \/>\nAnd another one of those hard assets is real estate. And real estate doesn&#8217;t work as quickly, so we can&#8217;t see if demand for real estate has gone up in the way that Bitcoin and gold have as quickly as we can see in those markets. But it&#8217;s something I just think is going to be interesting to keep an eye on over the next couple of weeks is, will all this uncertainty in the financial system lead people to want to put more of their money and their assets into real estate, which would obviously increase demand and put some upward pressure on the market?<br \/>\nSo hopefully, this has all been helpful to you. I really wanted to help everyone sort of understand what has happened, why, and provide some preliminary thoughts on how this could all play out. Of course, it is really early. So what I&#8217;m saying here are just some musings. I&#8217;m just sort of like, &#8220;Here&#8217;s what I&#8217;m thinking about, given what I know about this situation right now.&#8221;<br \/>\nBut obviously, we&#8217;re going to have to keep an eye on this, and we will make sure to give you updates on this podcast, across the BiggerPockets network. So make sure to subscribe to BiggerPockets, both our podcast or YouTube channel. Check out the blog and turn on notifications to make sure that you are updated anytime we are putting out information.<br \/>\nIf you have any questions about this or thoughts about what is going on with the financial system, you can find me on BiggerPockets. There&#8217;s a lot of really good, robust conversation about this going on in the BiggerPockets forums that you can participate in, or you can always find me on Instagram, where I&#8217;m @thedatadeli. Thanks again so much for listening. We&#8217;ll see you next On The Market.<br \/>\nOn The Market is created by me, Dave Meyer, and Kailyn Bennett, produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, research by Pooja Jindal, and a big thanks to the entire BiggerPockets team. The content on the show On the Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.<\/p>\n<\/div>\n<h2>Watch the Podcast Here<\/h2>\n<p><iframe loading=\"lazy\" title=\"YouTube video player\" src=\"https:\/\/www.youtube.com\/embed\/tFwmLjetI_E\" width=\"560\" height=\"315\" frameborder=\"0\" allowfullscreen=\"allowfullscreen\" data-mce-fragment=\"1\"><span data-mce-type=\"bookmark\" style=\"display: inline-block; width: 0px; overflow: hidden; line-height: 0;\" class=\"mce_SELRES_start\">?<\/span><span data-mce-type=\"bookmark\" style=\"display: inline-block; width: 0px; overflow: hidden; line-height: 0;\" class=\"mce_SELRES_start\">?<\/span><span data-mce-type=\"bookmark\" style=\"display: inline-block; width: 0px; overflow: hidden; line-height: 0;\" class=\"mce_SELRES_start\">?<\/span><span data-mce-type=\"bookmark\" style=\"display: inline-block; width: 0px; overflow: hidden; line-height: 0;\" class=\"mce_SELRES_start\">?<\/span><span data-mce-type=\"bookmark\" style=\"display: inline-block; width: 0px; overflow: hidden; line-height: 0;\" class=\"mce_SELRES_start\">?<\/span><span data-mce-type=\"bookmark\" style=\"display: inline-block; width: 0px; overflow: hidden; line-height: 0;\" class=\"mce_SELRES_start\">?<\/span><span data-mce-type=\"bookmark\" style=\"display: inline-block; width: 0px; overflow: hidden; line-height: 0;\" class=\"mce_SELRES_start\">?<\/span><span data-mce-type=\"bookmark\" style=\"display: inline-block; width: 0px; overflow: hidden; line-height: 0;\" class=\"mce_SELRES_start\">?<\/span><\/iframe><\/p>\n<h2>In This Episode We Cover<\/h2>\n<ul>\n<li><strong>SVB\u2019s (Silicon Valley Bank) collapse explained<\/strong> and why it failed so fast<\/li>\n<li><strong>The bank run \u201cdomino effect\u201d <\/strong>that could put other intuitions at risk<\/li>\n<li><strong>Why a \u201cbailout\u201d happened so quickly<\/strong>, and whether customer funds were secured<\/li>\n<li><a href=\"https:\/\/www.biggerpockets.com\/blog\/recession-proof-real-estate-investing-yield-curve\" target=\"_blank\" rel=\"noopener\">Bond yields<\/a> and why making long-term investments was a <strong>risky bet for SVB\u00a0<\/strong><\/li>\n<li>The <strong>future of <\/strong><a href=\"https:\/\/www.biggerpockets.com\/blog\/mortgage-rate-outlook-2023\" target=\"_blank\" rel=\"noopener\"><strong>mortgage rates<\/strong><\/a> and how SVB\u2019s failure could lead to fewer rate hikes<\/li>\n<li>The<strong> psychology behind a bank failure<\/strong> and how it affects the entire economy<\/li>\n<li>And <strong>So<\/strong> Much More!<\/li>\n<\/ul>\n<h2>Links from the Show<\/h2>\n<ul>\n<li><a class=\"c-link\" tabindex=\"-1\" href=\"https:\/\/www.biggerpockets.com\/agent\/match\" target=\"_blank\" rel=\"noopener\" data-stringify-link=\"https:\/\/www.biggerpockets.com\/agent\/match\" data-sk=\"tooltip_parent\" data-remove-tab-index=\"true\">Find an Investor-Friendly Real Estate Agent<\/a><\/li>\n<li><a href=\"https:\/\/www.biggerpockets.com\/forums\" target=\"_blank\" rel=\"noopener noreferrer\">BiggerPockets Forums<\/a><\/li>\n<li><a href=\"http:\/\/biggerpockets.com\/agent\" target=\"_blank\" rel=\"noopener noreferrer\">BiggerPockets Agent<\/a><\/li>\n<li><a href=\"https:\/\/www.biggerpockets.com\/blog\/real-estate-investing-bootcamps?utm_source=youtube&amp;utm_medium=description&amp;utm_campaign=none\" target=\"_blank\" rel=\"noopener\">BiggerPockets Bootcamps<\/a><\/li>\n<li><a href=\"https:\/\/www.biggerpockets.com\/signup?utm_source=youtube&amp;utm_medium=description&amp;utm_campaign=none\" target=\"_blank\" rel=\"noopener noreferrer\">Join BiggerPockets for FREE<\/a><\/li>\n<li><a href=\"https:\/\/www.biggerpockets.com\/podcasts\/on-the-market\" target=\"_blank\" rel=\"noopener noreferrer\">On The Market<\/a><\/li>\n<li><a href=\"https:\/\/www.fundrise.com\/bpmarket\" target=\"_blank\" rel=\"noopener noreferrer\">Join the Future of Real Estate Investing with Fundrise<\/a><\/li>\n<li><a href=\"https:\/\/www.biggerpockets.com\/forums\/-on-the-market-podcast?utm_source=youtube&amp;utm_medium=description&amp;utm_campaign=none\" target=\"_blank\" rel=\"noopener\">Connect with Other Investors in the \u201cOn The Market\u201d Forums<\/a><\/li>\n<li><a href=\"https:\/\/www.youtube.com\/channel\/UCxDXuLvtjJ9Est8PrG3i2VA\" target=\"_blank\" rel=\"noopener\">Subscribe to The \u201cOn The Market\u201d YouTube Channel<\/a><\/li>\n<li><a href=\"https:\/\/www.biggerpockets.com\/users\/davem27?utm_source=youtube&amp;utm_medium=description&amp;utm_campaign=none\" target=\"_blank\" rel=\"noopener noreferrer\">Dave\u2019s BiggerPockets Profile<\/a><\/li>\n<li><a href=\"https:\/\/www.instagram.com\/thedatadeli\/\" target=\"_blank\" rel=\"noopener noreferrer\">Dave\u2019s Instagram<\/a><\/li>\n<li><a href=\"https:\/\/www.biggerpockets.com\/blog\/how-did-svb-collapse-in-48-hours?utm_source=youtube&amp;utm_medium=description&amp;utm_campaign=none\" target=\"_blank\" rel=\"noopener\">How Did A $200B+ Bank Collapse In 48 Hours? Is Real Estate Going To Be Impacted?<\/a><\/li>\n<\/ul>\n<p><em>Interested in learning more about today\u2019s sponsors or becoming a BiggerPockets partner yourself? Email <\/em><a href=\"mailto:advertise@biggerpockets.com\" target=\"_blank\" rel=\"noopener noreferrer\"><em>advertise@biggerpockets.com<\/em><\/a><em>.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Both SVB (Silicon Valley Bank) and Signature Bank have crashed and burned dramatically over the past week. What once was a few large customers making withdrawals quickly turned into a [&hellip;]<\/p>\n","protected":false},"author":613609,"featured_media":147683,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[7320],"tags":[],"class_list":["post-147682","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-on-the-market-show-notes"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/147682","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/613609"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=147682"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/147682\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/147683"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=147682"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=147682"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=147682"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}