Confused about the bank collapse? Here’s how to talk about Wall Street
Wall Street can seem confusing, given its amount of jargon, banking terms and acronyms.
But headlines this week, from the collapse of Silicon Valley Bank to Credit Suisse’s need for a lifeline in the face of instability in the First Republic, have made finance a national concern.
So when you hear that the FDIC is taking over, that a Treasury portfolio is sinking, or that a bank has been backed and bailed out, what exactly does that mean?
Here’s a guide to all the key terms you’ve heard.
It is an acronym for the Federal Deposit Insurance Corporation, an independent government agency that protects depositors in banks. It is one of the main players in bank failures because it can intervene and ensure that institutions are functioning properly.
When a bank fails, the standard amount of insurance is $250,000 per depositor, per insured bank, for each class of account ownership.
To provide financial support to an institution that would otherwise collapse. Bailouts are associated with government intervention, as it did so well during the 2008 financial crisis.
It is important to note that although a government dispatched a rescue mission for the SVB and the First Republic, they were not bailed out by it.
How easily a company or bank can turn an asset into cash without losing a ton of its value. Liquidity can be used to gauge ability to repay short-term loans or other bills. People feel comfortable in liquid markets because it’s usually quick and easy to buy and sell.
The most “liquid” asset, as you can probably guess, is cash.
Deposits are money you deposit into your bank account and withdrawals are money that is taken out. A bank run occurs when a rush of customers withdraws cash all at once, often due to rumors or panic.
If a bank has a ratio above 100% (like First Republic), it lends more money than it has deposits. It’s not a good situation.
Investments backed by the US government – and known to be one of the safest on the market. They include treasury bills, treasury bills and treasury notes. However, treasury bills are sensitive to broader economic conditions like inflation and changes in interest rates.
The value of SVB’s treasury bill portfolio fell as interest rates rose.
Anything that could be used to generate cash flow. These can be tangible assets such as stocks and buildings, or intangible assets such as brand
Inflow is the money that comes into a business – think product sales and smart investments. The exit is the money leaving the business.
Technically, these are alternative steps a business takes to achieve its goals. This could include strategies such as diversification and product development.
But what does that really mean? The company could consider putting itself up for sale.
A quick and massive sell-off in stocks based on fear ahead – like rumors of a bank collapse.
Cash or other rewards that companies offer to their shareholders.
An action that allows a company to continue to survive. For example, Credit Suisse just received a $54 billion lifeline from the Swiss central bank, although that has yet to entirely allay investor fears. Another bank that received a lifeline was First Republic, when 11 banks deposited $30 billion.
This term is widely used in the financial industry to describe last resort financial protection, almost like an insurance policy. It is a secondary source of funds through credit support or guaranteed payment for unsubscribed shares.
A system used by the FDIC that allows it to act on a banking crisis that could drag the entire sector with it. Although it is quite rare to pass it, the FDIC used this exception to take over SVB and Signature Bank last week.
This is the main way the Fed uses to lend money directly to banks and provide them with more liquidity and stability. Loans last up to 90 days. Many banks are using this tool right now because the Fed made it easier to borrow at the discount window following SVB to prevent further bank runs.