What’s Going On? The Silicon Valley Bank Collapse vs. the 2008 Financial Crisis
Ever heard the phrase “Explain it like I’m 5”? It means taking a complex topic and breaking it down into terms that a 5-year-old can understand.
Over the past few days, I’ve watched a lot of commentators explain the collapse of Silicon Valley Bank. They’re talking about insured deposits, venture capital, ripple effects on the economy…. but what do those things even mean?
I worked in banking during the 2008 financial crisis (at a tech company with banks as clients). Now I’m a freelance content marketer and most of my clients are venture capital-backed tech companies. So I’ve had a front-row seat for both crises.
There’s plenty of information for founders and business owners right now, but what about regular people? Here’s some background about what happened and what it means.
Edited: I’ve been adding to this article as events have been unfolding!
What happened in 2008?
For several years leading up to the 2008 financial crisis, some banks were engaged in risky business.
The real estate market was booming. So banks were making a lot of loans for commercial real estate (business) and consumer real estate (mortgages).
The problem was that banks also relaxed their underwriting standards to do these loans. That means that maybe five years prior, the bank would have said “Nah, you can’t afford that loan.” And instead, said “Okie dokie — here’s your loan!” (Subprime lending was a big problem — banks were knowingly doing loans to borrowers with lower credit scores or other risk factors).
There were several layers of risk for the borrowers. One is that some loans had an adjustable interest rate: meaning the rate can change over time. When the rate changes (up or down), the monthly payment amount also changes. And the other risk was that the value of the real estate was abnormally high. A few years earlier, a house may have only been worth $275,000, and now it was worth $450,000. So banks were doing loans based on the house’s current value of $450,000.