Season 2, Episode 13: WTF Is a Bank?

Why we’re still supposed to keep our money in banks even though it seems like they’re no longer the “safe” option, what they actually do besides keep our money for us and other stuff you never thought you’d need or want to know about boring banks

How does a bank run out of money?? Isn’t a bank just a place where it’s safer to store your money than in an empty ice cream container in your freezer?? And why is everything in the finance world so freaking complicated??!?

In this episode, Caitlin asks Sara a very simple question: What the fuck is a bank? And Sara answers with a way too complicated answer. AS USUAL.

To make a long story short, banks do stuff with our money to make them more money, but also we need them to do that so they can loan us money for our cars and houses and dream pony farms, and they need us to not allllll need alllll of our money alllll at the same time for the whole system to work.

It kind of makes sense. Kind of. But the important part is that most of us don’t have to do anything different than we’re already doing. You should listen.

Oh! And do you have a passive income story? A success? A failure? Tell us about it in a voice memo and e-mail it to: womenonthevergepodcast@gmail.com

Ask us your dumb investing and finance questions for Season 2 on our Ask Us page!

This episode was edited by our co-producer Kelly West. Music by Bad Bad Hats and Devmo.

Transcript for Season 2, Episode 13: WTF Is a Bank?

WOTV_S2E13.mp3

Caitlin Welcome to Women on the Verge of a Financial Breakthrough, a podcast where we're figuring out finance. One dumb question at a time. I'm the dummy. Caitlin Meredith, a coach and mediator based in the Bay Area.

Sara And I'm Sara Glakas. I'm an investor advisor and founder of Black Barn Financial and the Austin Women's Investing Group, which can be found on Meetup and Facebook.

Caitlin Before we start, do you know a woman who might be on the verge of a financial breakthrough? Will you text her a link to our show and maybe to other friends while you're at it? Also, please, if you can leave us a review. This helps other women on the verge find us and we read them and they make us happy cry.

Caitlin Sara. I have always known that I'm dumb about finding it like a, sorry, that I have never properly been educated about finance and investing in some pretty basic money concepts. But I truly never thought I would be asking you this question. And I apologize. I have a cold, so I'm all super nasally. Not quite as sexy as Kathleen Turner, but I would like to think on that spectrum. What the fuck is a bank?

Sara Oh, that's not a dumb question these days. Right.

Caitlin It just seems like such a simple concept.

Sara Yeah. Why don't you explain to me what you think of it?

Caitlin Oh, right. This episode is me telling Sara what a bank is, how to run one. And my idea is that we live in some place like the the Wild West frontier towns. And it wasn't safe to walk around with all of your money in your pocket. So one guy opened a store. He called a bank that had like literal safes and everybody had their own safe and they put their money into that bank, into their own safety, what we would now call a safety deposit box. The exact money that they put in was theirs, sweaty from their pocket into their little box with a lock on it. And maybe they would pay the guy essentially rent to keep their money for them.

Sara That is the opposite of how banks work in a lot of ways. But I appreciate the sentiment. Right, Because that might be someone's first idea is that banks are set up to safeguard your money. Okay. So let me just let me just go back and say like what? Like what a bank is. So a bank does accept deposits from people or companies, right? You have your sweaty money in your pocket and you take it to the bank and you deposit it right in your account.

Caitlin Is it sweaty? But yeah.

Sara Sweaty, grimy, covered in like, gold dust from that.

Caitlin Right. I didn't just come off the wagon, but yes, that's that idea.

Sara Yes. So you put your deposit in and they just kind of market on the ledger. You know, Caitlin deposited $1,000, so the bank now owes you $1,000, Right. Does that part make sense so far?

Caitlin Yeah, my thousand dollars. Like, they didn't. I didn't loan. Oh, my God. I'm loaning them money when I put money in there.

Sara You are putting money in the bank. The bank is saying, hey, when you come back and ask for your thousand dollars back, we'll give you your thousand dollars back. Right. So. But it is. But that idea of the bank owes you that money. You put the money in. Yeah. And now the bank owes you that money back is important. Right. That's what a deposit is.

Caitlin Right.

Sara So that money in the bank is your asset. Right. It's something that you own that you expected increase in value over time, Maybe. But from the bank's perspective, it's a debt.

Caitlin Okay. And the agreement is when I come back and ask for it, they'll give me the same amount of money or whatever amount of money within that range.

Sara Right. But then the business of banking is they take your thousand dollars and they say, well, Caitlin's probably not going to come back for this anytime soon. Or Caitlin and all her friends or Caitlin and all of you know, the Bay Area or Caitlin and everyone in the country. You're not all going to come back to the bank at the same time asking for your money back.

Caitlin Okay.

Sara So instead of keeping money in the safe marked Caitlin Meredith.

Caitlin Don't touch these. Mine. Yeah.

Sara Do not touch Caitlin's thousand dollars. They say, Okay, well, we have now all of this money in deposits. We can lend it to people who need to borrow money and charge them some rate of interest. A higher rate of interest. So people need mortgages, right? People need car loans. People need business loans. People need all types of borrowings. So the idea of a bank is you borrow money from depositors and then you lend it out. And you get to keep the difference.

Caitlin Okay. The people you're lending it to through something like a mortgage are paying you interest for the money. So whatever, between two and 7%, you're getting on that money and so you're making money off of them. I don't even know how to say it. You're making off money. Off of the money. You have other people's money that you lent out to yet other people.

Sara Exactly. Okay. So if you if you deposit your thousand dollars, maybe your bank, you don't pay them for safekeeping. They pay you for keeping the money safe. Maybe they pay you 1% on your savings account or 2% or 3% on your savings account.

Caitlin Okay.

Sara But then they turn around and say, okay, well, I can lend this thousand dollars to someone who needs to buy a car. I can lend it to someone and make 8%.

Caitlin Did they ask my permission to do that? Like all those documents I signed without reading? Is that essentially what they said? No. Oh, it's just understood. That's what a bank is. So, yes. Okay. Once you walk in the door, you should already know what's going on.

Sara Okay. Yeah, that's what it's what a bank is. Since what the banking system is, is your. If I can lend the money at 8% and I can borrow it from you at 3%, I get to keep the 5% difference.

Caitlin Okay. I would like to just say that the community bank atmosphere lends one to think with the big safe in the back that you see. I think. Really? Paints the picture of the bank I described in the very beginning, which is your money is right here downtown where you left it. And we're here with those little deposit slips so you can get your money out of its locker. Like there's nothing about a small town community bank that says, like, the second we get your money, we're shipping it off out to other places to make us a bunch of money. And doing.

Sara That. That is true. Right. I mean, it does. There is some money in the bank, in the vaults. Right? Because if you come back for your thousand dollars, they want to have $1,000 in the bank to give you back because they owe you that money. But I think maybe where you're going with this is what happens when everybody shows up on the same day asking for all of their money back.

Caitlin Yeah. And when I look at my balances online, it's just like a theoretical spreadsheet number. It's not actually that someone could go in the back and count out my 1700 dollars. They're like, Oh yeah, it looks like this is how much you would be owed if you ever ask for it back. It's okay. Yeah. So what? They are holding the little county out cash machine when you go to the bank and actually ask for the money are the ATMs. That's like a fraction of the total money that they're managing and all of the accounts and making a budget decisions about what to do for them to make more money.

Sara Correct.

Caitlin Okay. Yeah, I knew it wasn't the nonprofit sector. But I thought, there was a bigger difference between a bank and a hedge fund.

Sara Oh, I know. I mean, and so this is where I'm going to stop you. A bank is not a hedge fund. The banking industry is highly, highly, highly regulated.

Caitlin More so than investment. Right. Okay. Right.

Sara So that idea of a bank taking your deposits. First of all, have you heard of FDIC insurance?

Caitlin It's on my list of questions. I heard of it. Do I know what the hell it means? No, but I can say it many times in a row. FDIC, FDIC. But yes, we'll be getting to that if you want to. Now, that's fine.

Sara Okay. So your deposits are insured up to $250,000 per person per bank, meaning there's no chance that you would lose money up to $250,000. Okay. It would be backstopped by insurance no matter what happens to the bank. So that's kind of the the protection on kind of that front end. And that's where most of us interact with the bank. Right. Right. Like you said, we take our $20 there. They put the money in the bank for us. They keep track of how much they owe us back. And really, like for a consumer, all you need to know is, well, if I put $250,000 into this bank account, I will definitely get it back no matter what.

Caitlin In this country.

Sara In this country. In the U.S.?

Caitlin Yes, because I've lived in a lot of countries where that is not true or they absolutely closed down the ATMs or that banks actually run out of current paper currency so people can't get it. But in our country the way it is right now, 2023, March 2023, that's how it works.

Sara That's absolutely how it works. And then on the other side, when we talk about, well, how can banks invest that money? How can they use your money to make more money? There are a zillion rules requiring what types of loans they can make to what types of people and parties, how much of those loans have to be two perfectly safe borrowers like the U.S. government? How many of them can be riskier loans to mortgage borrowers or small businesses? There are, I mean, just pages and pages and pages, books and books of banking regulations. So that's where it's not it's not a hedge fund. Right. It's not. It's highly regulated.

Caitlin I retract my comparison. I don't want to lead our listeners astray. Okay. It's not. It is, General. I mean, because we always say it's like such a safe place to put your money is that you won't make any money if you keep all your money in a checking account. So it's like it's safety is its hallmark. And also that's like one of the risks of putting it as there is. You won't make any more money off of your money.

Sara Exactly.

Caitlin It's too safe. It's the risk is it's to save a bank. Putting your money in the bank.

Sara Yes. Yes. For us. For putting our money in the banks. I'm talking about the people.

Caitlin Regular people.

Sara For regular people. Like it's there is. There's no risk to putting your money in a bank up to $250,000 per person. Per bank.

Caitlin Okay. So Sara sent out a newsletter to her clients, and in it she type. Sara's like a huge basketball person, and she highlighted a Greek basketball player who came to America and I guess made more than $250,000 and spread out all of his money. Will you tell the story?

Sara So there is a very famous, really, really good basketball player who plays for the Milwaukee Bucks named Giannis Antetokounmpo. And he his family's originally from Nigeria. They immigrated to Greece and that's where he grew up. And so when he came to the U.S. to play, you know, he now makes a gazillion dollars. But one of the things he brought with him to the U.S. is a healthy skepticism about the financial system. And so, you know, he takes part of his NBA star player salary and he divides up all of the cash that he wants to keep on hand. He passes it out only up to the $250,000 FDIC limits at all of these banks. Spread out across the country because he knows that anybody above $250,000 is uninsured and therefore at risk. And having lived through a financial crisis in Greece, he's not willing to take that risk. So this is something that a lot of Americans weep every once in a while. We have a financial crisis. Right. But then, you know, it resolves itself. It gets resolved some way and we kind of get fat and happy and kind of forget these things. But Yannis did not forget. And so he has his cash spread out only up to the $250,000 FDIC limits, which is really, I mean, really clever and a lot of work, right?

Caitlin Yeah. I mean, poor guy. He has to find a different bank for each of his $250 parcels. I am talking about a part time job. Oh, yes. But I love that example because it's I mean, it reminds me of like my grandparents telling me about the depression or my grandmother only filling up the bathtub a quarter of the way because, you know, depression era heating was expensive or something like that. Like these things that carry with us. It's like a living memory of what can go wrong. Even when you think nothing could go wrong, nothing could change. It's all good and nothing will ever change.

Sara Yes, agreed. And I think that people immediately, when Silicon Valley Bank was taken over by the FDIC, immediately people went back to the financial crisis of 2008 2009. It seems like it's far away, but we still all have this muscle memory about like what a real banking crisis and financial crisis looks like, because it wasn't that long ago that we actually had one.

Caitlin And the lies, the primary one, which was it's too big to fail like this marketing propaganda. We were told, even those of us who didn't understand any of it at the time, that these nothing bad could happen because they were too big or nothing bad can happen because the market will regulate itself for nothing bad. And then the thing that couldn't happen happens. And so your sense you take away from it is like another bad thing happens that couldn't happen. And then what's next?

Sara Yeah, I mean, I definitely think the banking industry is where people really want. There to be a clear set of rules that apply to everyone for all times. And that's not the case. There are the the banking system in the U.S., certainly, which is kind of the the largest financial system in the world. And the global financial system is so important that people, regulators, Congress, legislators, people will do whatever it takes to keep it working, even if it means changing and adjusting the rules whenever something bad happens. Certainly with Silicon Valley Bank, I think there were a lot of. Red flags that I mean, most people didn't see or understand or no part of it, it seems like, was the strategy that Silicon Valley Bank chose to undertake, which is different from the way most banks operate.

Caitlin Okay.

Sara Silicon Valley banks customers were different from most other banks customers. Their core customer base were startups and tech companies in the Bay Area and nationwide. So that was their core clientele, right? Which is really different from, you know, Frost Bank here in Texas or, you know, the credit union up the street or even, you know, Bank of America or or Chase or, you know, whoever. So, you know, that that was the first key. If you imagine having a smaller number of clients. Right, with bigger chunks of money. That in and of itself for a bank is a risk. You have like a concentration risk risk. Right.

Caitlin Right. And a sort of a league of its own. Because in a normal bank, people like us, our money's insured, as you said, up to $250,000. And here now, most of your clients wouldn't have most of their money insured.

Sara Right.

Caitlin Because it's in the millions. It's not in the thousands.

Sara Right. And so you have a bunch of people starting a business who are like, okay, I've got $10 million. I've got payroll coming up. I have, you know, technology I need to buy. You just have you're running your business and you're certainly assuming. The bank is going to be fine, but the money is going to be there when you come back for it.

Caitlin But also that you're going to need it in the kind of short term. Like investors don't give you $10 billion to use in ten years. Like the expectation is you're going to make something of it soonish. Right, right.

Sara Right, Exactly. And so, you know, maybe this is I don't know, like like I'm sympathetic to those business owners thinking like, yeah, you know, if I had $1,000,000 in the bank and I had it earmarked to use over the next six months.

Caitlin Right.

Sara One month, whatever it was like, that seems reasonable for a company to.

Caitlin To do. It's different than them saying, look, we have $10 million, we want to invest for our long term strategy. So we're going to invest it with Schwab to make money over time. Like this is work. These are working dollars dollars that have jobs in the near future.

Sara Right. So for Silicon Valley Bank, that was the deposit base.

Caitlin Right.

Sara Right. Which was different than a lot a lot of a lot of other banks. So that made it unique. Then on the other side, you have you know what we talked about. A bank will take deposits and then lend. Sometimes you call it lend on the on the long end. Right. Or at the long end of the yield curve. So I have deposits that I know theoretically anyone could come back for at any time.

Caitlin Right.

Sara And I'm supposed to give those people their money back. Right.

Caitlin Right.

Sara When they ask for it. Right. So that's on the short end. On the deposit base side. And then, like we mentioned, the way a bank makes money is taking those deposits and lending it out for longer periods of time. So this is what you are talking about.

Caitlin Right. But with Silicon Valley Bank. They also, depending on the economy, were probably expecting we'll always have more depositors. Because start there's always the new start up like not in 2008 but like in the recent years. Like there's startups everywhere. So we're always going to have new clients coming that just got their first round of funding. And so they could have some hubris, some a false sense of security about the incoming dollars they didn't know about for sure. But like given our pattern right now, we're just this is never going to end. We're always going to have new money coming in.

Sara Right. I mean, so certainly, like not only would a growing bank assume that the deposits would keep growing, but there would also be an assumption that all of your depositors don't come back on the same day to ask for their money back.

Caitlin Yes.

Sara Right. So you have those two assumptions that a banker would be making.

Caitlin Okay.

Sara So that's that's the deposit base, Right. And then like, there's the loans on the long end, too, Right? So if you think about a mortgage, like maybe some of these, you know, freshly minted millionaires who are the CEOs or founders of startups, maybe they want to buy a house, right? Who is going to lend you the money? Maybe it's Silicon Valley Bank that's a 30 year mortgage, a 30 year obligation. Right. The bank assumes it will get its money back, but in drips and drabs over 30 years. Right. You can lend money to the U.S. government either, you know, you can lend it to them for a month or you can lend it to them for 30 years. Same with car loans. Like all of these loans are maturing and you're getting your money back over different time periods. Right. So you're right that when you lend money out, typically you get higher interest rates on longer term loans. The nuance that I want to throw in there is that do you remember have we talked about bonds on the show before?

Caitlin Yeah, you were in the bond market and you. Yeah. Figure it out from the inside out as the only female.

Sara I like that. The only female in the bond market.

Caitlin Yeah.

Sara So one of the the most famous feature of bonds, if you're a bond investor, is that if interest rates go up, the price of bonds goes down.

Caitlin Okay.

Sara So what do you know about interest rates over the last year?

Caitlin Very, very low.

Sara They started.

Caitlin Low. They started low. I mean, I all like an associate is what people are complaining about getting in their high yield savings accounts or mortgages. So, you know, they started out mortgage rate interest rates were so low, anybody could buy a house and then they've been creeping up. So the housing market has been much slower because people don't want to pay for more expensive loans. So they're going up.

Sara Interest rates have been going up.

Caitlin And people have been happier with their high yield savings accounts because interest rates are finally something that like registers on some sort of measuring device.

Sara Correct. But if you made a mortgage loan at the end of 2020 at 2.5%. Yeah. And now a new mortgage can be issued at 6%. Right. People are going to be willing to pay you less money to buy a house.

Caitlin Yes.

Sara No, not for your household. I'm like, I'm talking about the loan. This is where things get confusing at 2.5% mortgage. If I wanted to sell that to another bank.

Caitlin Oh, I thought you meant the house. I can no think in terms of selling a house, but the house. Selling the house. Yeah.

Sara Put the house out.

Caitlin Of your money moving. Okay, now.

Caitlin Got it. Now I have bank. I got this mortgage. That's a 2%. But that's not a great deal for me because I'm only making 2% on it. So I'm trying to sell it to someone who. Who wants to buy that.

Sara Well, maybe. Maybe you don't want to sell it. You just want to wait for it to mature over 30 years and take your two and a half percent interest that you, the bank, are getting every year.

Caitlin It's better than nothing, right?

Sara It's already made. That's one of the investments we made as a bank. We're making new investments now. That's one of our investments is a 2.5% mortgage. Now we're trying to make 6% mortgage loans, right, so that we can collect the 6% over time.

Caitlin Right.

Sara But where this like goes off the rails in terms of understanding and in terms of Silicon Valley is what if a bunch of your depositors come asking for their money today?

Caitlin Right.

Sara You don't have it because it's all in 2.5% mortgages that you made three years ago. How do you get them? Money to pay off your depositors. You have to sell the mortgages.

Caitlin Okay.

Sara You can. You can sell a mortgage. You can buy and sell mortgages amongst banks or, you know, hedge funds or whoever's whoever's buying it. But that 2.5% mortgage is now worth way less to a new buyer today because it only pays 2.5% instead of 6%. So does that part make sense?

Caitlin It's a low yielding thing they're buying. Yes. So they're not going to pay very much for it.

Sara Exactly. So if Silicon Valley Bank has a bunch of 2.5% mortgages on their books, those are the banks assets.

Caitlin Right.

Sara But now they have to sell them because they need money to pay back their depositors.

Caitlin They have some money.

Sara They're going to lose money. And it's going to happen fast because of the way banks make money. That mismatch is the real source of risk in banking. It's well, if if Silicon Valley banks depositors didn't all come to the bank on the same day asking for their money back, we wouldn't be having this conversation. Yeah, right. They'd still be collecting their 2%, 2.5% from sun mortgages. They're 6% from other mortgages. You know that interest on their car loans and paying back their depositors. You know, when a few people show up, they'd give them their money back. But when it all happened at once, all of a sudden, the assets that Silicon Valley Bank had had to be marked down very quickly in order to turn them into cash.

Caitlin Okay. I understand the mechanism, but it feels like everything you've taught me before would be don't put all your eggs in a 2.5% mortgage investments. So for this exact scenario, like obviously this is an emergency, like maybe not a single bank could deal. If everybody that had money in it came to us withdraw. It would. It wouldn't. There wouldn't be enough money. So I get that that Silicon Valley bank is no exception there. However, and so they must plan on we need to have 40% always available for everybody. But beyond that, that's a safe unless apocalypse, we don't have to plan on that. However, if too much of their money was tied up in the 2.5% Mortgages, it's sort of inevitable that they might be able to serve even fewer than 40% of their customers if they came in needing their money. And on top of that, if something shifted in the investment world and people weren't giving money to startups anymore, they wouldn't have new money to flood with all those things. Like there's all these contingencies for things not working out exactly the way they would in an ideal world. And to what degree do we expect them to have thought through those contingencies and not acted like arrogantly, whatever the economic environment was at the time?

Sara Yeah, And this is where I think you're exactly right that each bank has, you know, professional banking professionals.

Caitlin Double banking professionals. Yes.

Sara Banking is supposed to be boring, right? It's supposed to be boring. You're making a little bit of money all the time, but you are managing your assets, like you said, and diversifying in however ways bankers diversify to make sure you don't get caught in this type of scenario. And with the Silicon Valley Bank story, like for me, I think the most alarming detail is that they didn't have a chief risk officer all of last year. Their chief risk officer, which a bank is supposed to have. That's who's managing the risk of the balance sheet.

Caitlin Doing the numbers every day like, Oh shit, we don't have enough to give more than this. Number of people want their money back, hold off all new investments, Keep the money that we have.

Sara Whatever. Right. Right. Like at a bank, there is a committee. There are people who are managing that asset mix to make sure that they don't get caught in this type of scenario. Silicon Valley Bank didn't have that person last year. Is that.

Caitlin Legal?

Sara I think it's legal. I mean, that might change. That might be one of the things that changes right away, but that in retrospect, now that everybody look deeper, like, wait a minute, like like the old guy, he retired, he didn't retire. He moved to a different bank. He went to a different job, like in March of last year.

Caitlin The numbers. And it's like.

Sara Maybe that will be dug into why you did this with my family. Why did it take them so long to hire a new person? And what happened in the interim? That is a really interesting part of this story. But I think it's also. Part that is specific to Silicon Valley Bank. So this is where like the flashbacks to the the great financial crisis of 2008 2009. During that period of time, you'd had a long series of years where kind of all the banks ended up exposed to these very risky investments.

Caitlin And by exposed to risky investments, you mean they did really bad risk calculations. They leveraged themselves too much and ran out of money and didn't have money to give to the people that had entrusted them with the money.

Sara Well, in the great financial crisis, the banks made a bunch of loans to people who didn't pay them back.

Caitlin Right. Right.

Sara Mortgages, Right? Exactly. So if you that's one source of risk is a bank lend someone money and that person just doesn't pay them back. That's called credit risk. Right. Right. So that has to do with the credit worthiness of the borrowers.

Caitlin Well, and also the overall economy, people losing their jobs, a pandemic hits like all very, very external reasons for why someone who cannot cannot pay back the money they were lent.

Sara Absolutely. So you and I did that episode on credit scores with Matt Shultz. There's, you know, corporate credit rating agencies that do it for companies. So, you know, there are ways to assess the credit. Yes, the credit worthiness. So the great financial crisis was precipitated by just making a ton of loans to people who didn't pay them back ultimately. So like that, that crisis was caused by credit risk.

Caitlin Got it.

Sara This crisis, if it turns into a crisis or this, the Silicon Valley bank story was caused by what we call interest rate risk or duration risk. And that's the idea that on these long term loans, if interest rates go up, yeah, the prices of bonds and loans goes down and now your assets might be worth less than. Right. That the deposits that are being demanded by your depositors. Right. And so there's that and it's caused by interest rate fluctuations, not by credit.

Caitlin Of which we have seen a lot in the past five years.

Sara Right. And so that especially over the last one year, interest rates went up so far, so fast that this is one of the. Unintended side effects of that happening. And so now everybody's going around to all of the banks and trying to figure out, okay, how much duration, risk or interest rate risk does your bond or loan portfolio have?

Caitlin Yeah. Meaning how much of your customers money do you have tied up in investments that A will take a long time to cash get get paid for and B are now worth less if you need to sell them?

Sara Exactly. Yes.

Caitlin Okay.

Sara And so that's that's the part of what is happening now with this cascading effect. Like, what is the what's the value of the assets that these banks have and are they in balance with what they owe depositors?

Caitlin So the fact that you're able to know this so in and out and and that I can grasp it very lightly is that this is a known pattern in the financial world. When interest rates go way down, this is the risk that follows when they go way up. This is the risk that follows. So there's nothing that you're explaining right now that they wouldn't have known when they were throwing a bunch of cash into low interest mortgages. Anybody in this world would have been like, Oh, yeah, they're doing this. And here's the risks that go along with this strategy that they're doing now, which wouldn't mean don't buy any of these mortgages or don't offer any of these mortgages, but like, there's got to be a cap on it. Cause if I know this is crazy to imagine, but the world economic climate changes.

Sara Yeah.

Caitlin Then there are two, as the finance people say, exposed in this market. Yeah. And nobody was doing that or not enough people or somebody wasn't listening to putting all of their eggs in this basket. That turned out to be a very risky one.

Sara Silicon Valley Banks Basket. Ended up being more vulnerable than either it knew, the bank itself knew, and it was precipitated by Peter Thiel telling all of his venture capital buddies to go pull all of their money out at one time. So it was like that double effect on each side that made it so fast and so dramatic.

Caitlin Okay. So they might have been able to, like, tiptoe on eggshells past that, It's like, Oh, wasn't it funny when we almost lost everything except for a big loudmouth in Silicon Valley who got wind of their sensitive financial times and said, Everybody get your money out now.

Sara I mean, well, I think it wouldn't even be a tiptoeing because like the event that precipitated the need to sell lower priced assets happened because everybody pulled out at the same time.

Caitlin Okay. But I. Right. Right. Which all banks are forgiven for not planning for that scenario every day because if they did, they wouldn't be able to do what banks do. Like, it's just not realistic to run a bank with the assumption that tomorrow any day everybody's going to come ask for all their money. Is that okay? Yeah. But are we. 20, 23 to the point where we think anything in the entire world could shut down four days from now? That's happened. Mm hmm. And where We might not get any new money in our bank. And I know, like, even in our personal lives, we've stopped making these. Like, I don't buy travel insurance now, thinking, like, Oh, my God, COVID could shut down any other thing. So I get that we're all loosening up from our tiny decisions to our bigger ones about like tomorrow the world could stop. But don't they have a bigger responsibility to not pretend that that couldn't happen again?

Sara Oh, absolutely. I mean, and this does go back to banking regulations trying to mitigate. The types of risks that banks can take. Silicon Valley Bank, in the grand scheme of things, was not a huge bank.

Caitlin Right?

Sara It's a minor player. No one, as far as I can tell, nobody feels bad that all of the owners of Silicon Valley Bank got wiped out. I don't think anybody's crying about that. Right. But depositors, that is where there's some political backlash, because it turns out that the the FDIC and the Treasury Department, I think also they set up that in the Federal Reserve, they set up programs that said, listen, nobody no depositors are going to lose money even if they're over that $250,000 FDIC limit. So you saw the price of Silicon Valley Bank go from like $200 a share to nothing. Right. That's those investors got wiped out. Which is way different from depositors getting wiped out and losing money. And so regulators and bank regulations are trying to you're trying to walk that line. You want people to have confidence in the financial system because I cannot overemphasize how important it is.

Caitlin We all rely on everybody's confidence in the system.

Sara Now, owners of banks are absolutely going back to the people running the bank. Like how exposed are we? How risky is this business? What I think.

Caitlin Happened to us.

Sara Right? Yes. What are the stress tests that I guarantee you? Every bank in the U.S. is running stress tests now, Right. So that they can answer that stress.

Caitlin Test is somebody being like, what if this happened? What if that happened and someone running the exact numbers for what that would look like for them?

Sara Right. They do that very formally for the big banks, the too big to fail banks in the U.S. So Bank of America, Jp morgan, right. Like Wells Fargo, the huge banks have to go under. They have formalized stress tests that they have to pass. And if they don't pass them every quarter, I think they don't get to issue dividends to their owners. They don't get to do share buybacks. They don't get to do a whole bunch of stuff. If they don't pass the stress test.

Caitlin There's a consequence that's not just meant as a punishment. It's meant to protect their investors money.

Sara Yes. And that that's new as of the financial crisis. Okay.

Caitlin The so-called Frank Dodd.

Sara Yes, that's right. Frank Dodd.

Caitlin Act. Yeah.

Sara That's so good.

Caitlin Okay. But Silicon Valley was an exception to that because they later went in to amend it so that banks with a lower amount of the assets wouldn't have to do those stress tests because they said it was too onerous, it's too much work. And that's not fair because they don't have all of this money.

Sara Exactly. So all of those reams and reams and reams of banking regulations, the most onerous ones now only need to be used by the too big to fail banks and these smaller regional banks as of what, 2018 is that when like kind of they got a lesser version of the stress tests in 2018 so they didn't have to do as much stress testing because it's not inexpensive to do these stress tests and have all of this compliance and all of these.

Caitlin And quite frankly, they couldn't have if they didn't have a risk officer, because theoretically, that would have been their job. Right? Right.

Sara Right. So, yeah, so I don't know what was happening at Silicon Valley Bank, but this idea, you want people to want to make money from banks. You want a lot of banks doing lots of things to get money into the economy so that we can borrow money for mortgages and starting businesses and all that stuff. You want lots of banks and you want them to be able to lend money that is so important to an economy. But like you said, like it has to be, if it's not done safely, that damage has to be contained in some way so it doesn't infect everything else. And so that's where we are now on March 18th, is trying to figure out, can this be stopped before it starts getting out of control and people just start pulling their money out of you know, out of. Banks that otherwise would be totally fine too, cause these bank runs and I think that's where the the, the FDIC certainly like has a process for taking over a bank and shutting it down. They always come in on a Friday and then tell you over the weekend what they decided. And so that by Monday, everybody understands what's happening. The Department of Treasury has started new programs to try to give banks a lifeline or a program to make sure they can meet depositor redemptions.

Caitlin Depositor redemption is me coming to my bank and saying I want my 1300 dollars back.

Sara Right. Right.

Caitlin Okay.

Caitlin Is this your passive aggressive way of telling me to take the money out from under my mattress and bring it back to the credit union and put it in there where it was until two weeks? Yeah.

Sara I mean, you know what? Like the the upside to this for consumers is that. So right now, CDs offered by banks are paying a lot. Right? Because now all of these banks are like, oh shit, we got to get money. We need deposits, right? Like, and so we're willing to pay. I think I think I saw like a six month CD at over 5% the other day. Right. So you can keep it under your mattress or if it's less than $250,000 under your mattress, you could go out shopping and put it in any bank in the United States in an FDIC insured CD and maybe get 5% instead of no percent under your mattress.

Caitlin So they're offering higher percentages to be like, hey, you can make money with us. Come here for two reasons. One, to incentivize, provide us with an incentive to put our money there, but also because.

Caitlin We also kind of need more cash. Right, right, right. Everybody win, win, win.

Caitlin Your encouragement of all of us keeping high confidence in the banking system and just keeping our smiles plastered on and keeping our deposits. All right. Because if one person loses cover and that spreads. Reminds me of something crazy, which is So I was an aid worker in Africa forever, and we had these Land Cruisers and you were often transporting patients or somebody else who had never been in a car before in on terrible. I use the word road lightly, like just very rugged driving in places with, you know, either that you used to have a road with lots of potholes or over the sort of dirt paths. And our fear was always that if one person puked, everyone would go. It was never an in-between number. It's like it was contagious. And if you made it and no one had done it, you were fine. But the second one person did. Yeah, it's just the entire Landcruiser was also sort of reminds me of that. That, like, you're trying to keep everyone super happy because the whole system depends on every but not no one catching a whiff of that fear or revulsion and having a similar reaction.

Sara Yes. I mean, yes. And I would add to that that whatever comeuppance you think that bankers are going to get from a banking crisis, regular consumers, regular people will get ten times that. Right. And so there's no it's it's a lose lose situation to have a banking crisis like you want to keep it contained. You want to keep things moving. Because ultimately, if a regular person can't get a mortgage or can't get a small business loan or can't get a car loan, they will suffer. Ten times a thousand times more than a banker. Right. It's just like. So we can all like hem and haw about, like, moral hazard and all of those things. But my opinion is, whatever it takes to keep things on the rails needs to be explored.

Caitlin Like small businesses need loans all the time.

Sara All the time.

Caitlin And if then they change thresholds for who can borrow or how much or how strong their business, then like a lot of independent small businesses, won't be able to borrow money anymore.

Sara Yeah. Who do you think the riskiest borrowers are?

Caitlin Right.

Sara Right.

Caitlin It's us. It's us.

Sara Right. Like, this is. This is something that could be repeated at other banks. It doesn't mean that it's a huge crisis. It means that they're going there are going to be some banks where the same thing that happened at Silicon Valley Bank, maybe something very similar could happen at other regional banks. But that doesn't mean that we need to panic across the board. It doesn't mean there's going to be a flash back to 28, 29. And like, if you're interested in, I don't know, learning about the banking system. You can read the articles that come out on how the Federal Reserve and the Department of Treasury and the FDIC handle bank closures. I don't know, like I was about to say, because it's actually really interesting. But then I tried to stop myself, but that there are a lot of very serious professional people that work in banking, unlike some of these other industries, where it can kind of turn into a clown show. That is not the case with the banking and financial system these days. There are very serious, thoughtful people who are doing the best they can to just keep our financial system strong. And we are in a different place than we were back in 2008, 2009.

Caitlin And that's very reassuring. But tell me the piece that you find so interesting about what the FDIC like is this. I am imagining the movie scene where it's more like an FBI raid. But like, you know, they lock the the front door. They put a sign on the front saying customers refer to this website for more information or something. And they come in and all their people turn off all the computers and get the.

Sara Yeah. I mean, the FDIC shows up usually after the stock market closes on a Friday and they'll just show up and be like, we're here to take over your bank. Right. Like, it's you're not a going concern anymore. You can't be basically can't be trusted to run this bank anymore. And all of the FDIC people will just kind of go into the bank. They'll get an accounting of what the financial state of the bank really is. And a lot of times over the weekend, they'll try to find another stronger bank to take it over right to left. They'll try to merge a weaker bank with a stronger bank. They'll try to get someone to buy it, like because the FDIC can be trusted to give everybody the real information. Right. Like they're not going to lie to anybody but not going to try to orchestrate like these mergers or these marriages or these purchases instead of just letting a bank fail.

Caitlin Wow. Is anyone arrested? Like are they not allowed to leave the room or are they cell phones taken?

Sara I mean, I don't think that people really it's been I can't even think of a time where a banker was arrested. You would have to you'd have to be defrauding people, not just making bad decisions. Right. There would have to be. Once the last time a banker got arrested for their bank failing. I'm sure there's something from the financial the great financial crisis that I'm not thinking of. That's very obvious, but I can't think of it right now. Usually it's just like, Oh, that sucks, right? Like, your depositors all came on the same day and took out all their money. Like. And you said this before, Like, no bank can withstand that.

Caitlin Like, right.

Sara Like Bank of America. If every person or the Bank of America account went on Monday and took out all their money, Bank of America would fail to because it's just the money's not in the vaults, you know, like we talked about at the very beginning.

Caitlin Well, and obviously, if I tweeted like, oh, this bank is in trouble, A, I don't have a Twitter account. B. Nobody would listen to me. But like, it is a risk is social media.

Sara Yeah. Yeah. That is that's different from how it was during the financial crisis. Right? There wasn't as much social media clout that does make this. Pretty interesting that if you get one person like Peter Thiel, who a lot of people listen to, if you get one person, one person can cause a bank panic. And that really wasn't the case before. So that is it's a new risk in this world and also that we all bank digitally. So, like your your withdrawal can be like, boop, boop, boop, you know.

Caitlin Right. It's not like, okay, now I have to get off work early, get in my car, drive down to the bank or whatever. Yeah, it's like a while in line getting a taco. I can move $3 million.

Caitlin Right.

Sara But don't worry. Are. Are you under $250,000, FDIC?

Caitlin Yes. And I'm also not on Twitter, so I feel like I'm totally secure right now. I don't I wouldn't know if someone tweeted that to me. I couldn't tweet it to the world. Okay.

Sara Coming back to banking specifically, the rules are there to keep one person's miscalculation of risk. Right. It's contained.

Caitlin Right, Right, Right.

Sara Like you don't want systemic risk where across the board, people are encouraged to take outsized risk for minuscule gains. So you do want to prevent that. That's like moral hazard, right in the system. You don't want to incentivize people like.

Caitlin The mortgage crisis.

Sara Right. Like you don't you don't want to incentivize people to take risk. But you also don't want unintended harm from, you know, one person or one small group of people who just got it wrong. Like you don't want that to blow up the financial system. You're trying to like, keep it, you know, just kind of keep it in between. Right. So that that we all think about the risk that we're taking, but that we don't panic about something that is not risky. So this is where like, don't go to the bank and take all of your money out of the bank. You don't have to. You are gaining nothing. What are you going to do with all that money? This you're introducing a new risk.

Caitlin Right.

Sara Like, where are you going to put it right if not in a banking system? So like, we're trying to be calm enough and consumers should definitely have an idea of the risk they are taking, which again, comes back to that $250,000 limit. Right. Right. So now I think most people are aware of that or reminded of it. But if you are not taking any risk, if you're at any bank, if you're at Silicon Valley Bank, if you're at the bank, that's the next bank to fail. If you have less than $250,000, you're taking no risk.

Caitlin Okay. So I don't with my, you know, four, four figure savings account, don't have to go interview the president of my local credit union. No, like. All right, let's talk bonds. Yeah. So what's your vision for the 2024? Whatever. Because I have under $250,000, so my security, like they are truly safe for me. Yes. My checking and savings accounts that are all well within that $250,000 threshold are completely safe. Yes. If I have more than $250,000 in cash, that for some reason I need to keep as a cash object in a bank account, I have some other options, like our basketball player who puts them in different accounts or whatever. Maybe I should be investing that money. But if I'm starting a business and I need to park it somewhere, then it might be a time to be more curious about who is making decisions for what. This money that I've deposited, where it goes. Yeah. And then I'm exactly somebody to do that for me.

Sara Yes. Yes. There's there's no risk and there's no gain. Like with those FDIC insurance limits, I think is my only my only real point. So I spend as much time as you want to like researching your bank. And if you only want to support bankers that bank the way you think they should bank and you really want to dig into it, then cool. But you don't have to write. You don't only have to bank with like the very best to take like the perfect amount of risk and like the perfect like the perfect duration hedging and the perfect strategy, right? Like there's a lot of gray area and it's okay. Like.

Caitlin Well, I appreciate that point that I think I just keep coming back to like, there is one way the smart way to do it, which is to mitigate all risk. But to be honest, the financial system I would come up with would be like one shell equals one shell, and you keep.

Caitlin Those shells like there would be no such thing as interest. Like it would have to be.

Caitlin So simple like that. The world, I guess, would collapse if I had my way. So but that, that like reasonable people can differ in their approaches to all the stuff. And for the most part that works, as long as they're not leveraging too much of your money and whatever they're. Little schemes are. It just. I know this is a product of the news cycle as well, but it's hard to read about this. And then to have all of these pundits come from, Oh, this was a huge red flag. This is a huge red flag. So you start to be a little like, Well, wait a second. If there was all these red flags, how could it have gone on for like, are we all idiots now?

Sara And like, analyzing financial companies is way harder than almost any other company. There should be no expectation that anyone can analyze a bank and figure out if it's worth having deposits there or worth it. You know, like it. It's just it's really, really, really difficult. So just I think it's a I think it's a waste of all I think it's a waste of time.

Caitlin I agree with you on that. It just makes it even scarier because they hold our money. And if they're too complex for it's like they could be doing a lot of secret stuff there and nobody can even tell till it's too late.

Sara It is really difficult to get a bank charter and to become a bank. It's it's really, really hard that the just the banking regulations that are set up and the people who are allowed to have a bank charter and allowed to set up a bank, it's really, really difficult. It's like there's lots of like background checks and, you know, like all of these hoops you have to jump through to do it. So it's not something that just anybody can do. Okay.

Caitlin Okay. Sara, I'm guessing I know already, but I want to hear what a woman on the verge of a financial breakthrough can do today. Visa via her bank.

Sara Yes, I. Maybe I'll do, too. Okay, so the first thing I would do is, for those of you who are lucky enough to have cash balances over $250,000, I would just make sure that you have your cash spread out and you are not keeping cash over the $250,000 DC insurance limit at any one bank. So for those of you who have either like to keep a lot of cash on hand or for whatever reason you have a lot of cash, just check in on those limits and it can be as easy as looking at every just look at every bank that you bank with and add up your checking savings and certificates of deposit or CDs that you have with each bank and making sure that when you combine those all together, you're not above $250,000. Okay, So that's number one. I mean, and I would say I'm kind of intrigued by the way that this banking scare has affected FDIC insured CD rates. I mean, this is even going yeah, this is even going to like high yield savings, which I used to hate talking about. And now all of a sudden, like, I kind of love talking about high yield savings because it's starting to get interesting. So for these CD rates, you can get the highest rates going through a brokerage account. And I hope that doesn't sound too confusing, but if you have a Fidelity account or a Schwab account or TD Ameritrade, if you call them or click on the fixed income tab on your brokerage.

Caitlin Account using her finger.

Sara My finger is clicking and my imaginary mouse, you can look at this CDs that are available nationwide. And so why I love this is like okay, if I bank at I think at PNC. So if I walked into my PNC branch, they would probably say like, Sara, you can get a 12 month CD, 2.5%. I know that if I go through my Schwab account that I can get a 12 month CD at over 5%, maybe 5.25%. So if you have money that you want to keep perfectly safe, but you don't mind locking up for the term of a CD, three months. Six months.

Caitlin Okay. Right.

Sara You can earn interesting rates of return on very short term money. So instead of keeping money in savings, you could move some of that into an FDIC insured CD and maybe get over 5% taking no risk. I don't know. I think that's interesting.

Caitlin I do, too. And I love that that was such a quick turnaround because it was less than a year ago that we recorded an episode about high yield savings and you're like, Oh my God, I don't want to talk about it. And so it's just another reminder of how things can change over a quick amount of time that allow us to reevaluate where our opportunities are. Yeah, to build our money. And for some people a CD feels really safe and right now you're in luck because you can actually make a like a detectable interest rate.

Caitlin Right? Whereas for a couple.

Caitlin Of years on there. It was really like the time it took to invest, put money in one cost more than actually the interest you would receive from it.

Sara Exactly.

Caitlin Sara scorn. So we're going to get. That's the one that I thought you were going to say. I thought it would be. Don't take your money out of that.

Caitlin If you can do one thing today, it's.

Caitlin Keep your money in whatever it is in your banking and your savings in checking account. But I love that idea for people that have more than 250,000 to like, really think about you. You can do it in such a way where you feel safer. It's a little bit more admin work to change it to different banks, but that's a way to be completely safe. And then the other is to take advantage of these CDs for the money that's like hanging out that we don't need today, but might be half of our emergency funds if it's a three month one.

Sara Exactly.

Caitlin Okay. Thank you, Sara.

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Caitlin Hey, before we go, thank you so much to Kelly West, who co-produced and edited this episode.

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Sara If your partner is making you ask for money, giving you an allowance are not letting you know about family income. This could be economic abuse.

Sara Learn more at thehotline.org, or call one 800 799 safe.

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Devmo I know the first thing you notice is that I'm covered in gold, the flick of the wrist it could turn a hot bitch cold, to get what you want in life girl you gotta be bold. Now Imma die rich, and I know...

Sara This podcast contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized investment advice. Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this podcast will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security.