Banks Go Bust: Inside Recent U.S. Bank Failures | April 2023

April 10, 2023

OC Ferrell

When news of possible problems at Signature Bank and Silicon Valley Bank spread, it caused a run on both banks, leading to the second and third-largest bank failures in the United States since the Great Recession in 2008. The FDIC estimates the failure of Silicon Valley Bank alone will cost the Deposit Insurance Fund about $20 billion.

The History of FDIC Insurance

During the Great Depression in the 1930s, hundreds of banks failed, and their depositors lost everything. In response, Congress established insurance funds for banking institutions to give depositors peace of mind. While the Federal Deposit Insurance Corp. (FDIC) insures deposits up to $250,000 and the Fed often covers amounts that are not insured, this does not stop people or companies from withdrawing their money from a bank on news of a possible failure.

Signature Bank

Signature Bank was put into receivership on a Friday. A receivership is a form of debt restructuring that helps troubled companies. By Sunday, it was taken over by the New York Department of Banking Services. The run caused a problem with capital adequacy requirements and the regulators needed to step in to stop the run on the deposit base. With $110 billion in assets, this was the third-largest bank failure ever. The FDIC sold nearly all of the bank’s deposits and some of its loans to New York Community Bancorp Inc.

Silicon Valley Bank

Silicon Valley Bank was a lender to small technology and biotech companies and was known as a bank that would lend to innovative companies that often could not get loans from the big banks. In addition, it was a bank where many venture capital funds had large deposits and often these venture capital funds had funded a tech company that had a borrowing relationship with the bank.

Silicon Valley Bank was without a risk manager for almost a year, and there were lax controls. The bank, which invested in long-term bonds was affected by the Fed’s interest rate increases, and its bond portfolio had losses on its balance sheet of billions of dollars. When the bank tried to raise cash, many depositors moved their money out of the bank and created a classic bank run, despite insurance, contributing to what became the second-largest bank failure of all-time with $209 billion in assets.

Shortly after the collapse, First Citizens Bancshares Inc. acquired pieces of Silicon Valley Bank in a deal with federal regulators. First Citizens, based in Raleigh, North Carolina, is one of the largest regional banks in the country. The deal includes $56.5 billion in deposits and $72 billion in loans (at a discount). About $90 billion of Silicon Valley Bank’s securities remain in receivership. To support the deal, the FDIC and First Citizens came to a loss-sharing agreement to share any losses or potential gains on Silicon Valley Bank’s commercial loans, reducing the risk for First Citizens. The FDIC is also providing First Citizens with a $35 billion loan and a $70 billion line of credit. The line of credit is intended to help cover a potential “deposit flight.” This is when worried depositors pull their funds from smaller banks in favor of larger banks.

Stock market reactions

In the immediate aftermath, the FDIC and the Fed assured everyone that their money was safe and not to worry. However, when the stock market opened after the weekend, bank stocks, especially regional banks plummeted, some as much as 47 percent. The overall bank index listed on the New York Stock Exchange fell by 11 percent and financial stocks lost an estimated $465 billion in value. Large banks such as JPMorgan Chase, Bank of America, and Citigroup were not affected as much because they have more diversified business models and customer bases. Some say they are too big to fail. Wall Street analysts have said the stock market activity is an overreaction and not an indication of systemic weakness.

In the weeks following the crisis, many Wall Street analysts recommended buying some of the regional banks. The analysts thought that buying these regional banks at bargain prices and high dividend yields would pay off over the next 12 months. Their reasoning was that most regional banks had thousands of small depositors who were unlikely to take their money out of their local banks. Silicon Valley Bank had large depositors connected to venture capital firms, tech, and biotech companies. All it took was several large depositors to take their money and run and the rest of the big depositors followed.

Through the use of emergency powers, the FDIC and the U.S. Treasury Department guaranteed uninsured deposits (those above $250,000) at Silicon Valley Bank and Signature Bank. They also created a new emergency lending program called Bank Term Funding Program to help banks meet withdrawal requests.

The Future of Bank Insurance and Bank Failures

Financial experts, economists, and politicians disagree on how to handle bank insurance and bank failures. Some think the FDIC should ensure all deposits whereas others think doing so creates a moral hazard because it could encourage banks to take more risk knowing they are insured to the maximum. Some think that it was a lack of oversight by all the agencies that oversee banks whereas others think regulators need to roll back regulations that loosened bank oversight in recent years. The debate will continue.