When Banks Go Bankrupt: What You Need to Know About the Recent Bank Failures
On Friday, March 10, the Silicon Valley Bank collapsed. Two days later, New York-based Signature Bank failed. In a joint statement Sunday, the U.S. Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp. (FDIC) announced that all deposits at both banks would be guaranteed, but not at the expense of taxpayers.
Bank failures can understandably cause consumers to worry about their own funds. Fortunately, there is generally no need for panic. Here are all your questions on bank failures, answered.
What caused the two recent bank failures?
The short answer to this question: a bank run. This happens when lots of depositors withdraw their funds in cash at the same time causing the bank to run out of cash.
Two days before the SVB collapse, the bank’s CEO sent a letter to shareholders informing them that SVB had recently lost $1.8 billion. This sparked panic among the bank’s customers, who collectively withdrew $42 billion from accounts on Thursday. By Friday morning, SVB had a cash balance of negative $958 million.
Two days later, on Sunday, New York state regulators closed Signature Bank. At Signature, a similar bank run occurred.
What do the failures mean for the banking industry and the economy?
According to the Fed: “The U.S. banking system remains resilient and on a solid foundation, in large part due to reforms that were made after the financial crisis that ensured better safeguards for the banking industry.”
This statement refers to the reforms placed on the banking industry during the 2008 financial crisis. However, some reforms have since been rescinded, including the Dodd-Frank Act for regional banks with less than $250 billion in assets. The Fed also announced it will create additional sources of liquidity through the creation of a fund that would safeguard deposits.
Some economists believe the Fed will dial back efforts in raising interest rates. Also, while some warn of impending stock declines and other alarming factors, the long-term impact of the recent bank failures on the economy will only become apparent with the passage of time.
Will bank customers get their deposits back?
All deposits at federal banks are insured by the FDIC up to $250,000. This applies for both corporate and personal accounts. The U.S. government has also announced that all customers of the failed bank will get their deposits back, including those worth more than $250k.
The FDIC will facilitate buyers for SVB and Signature Bank. It will also sell off SVB’s assets to be used for future disposition.
Is my money safe at a credit union?
As a member of New Orleans Firemen's Federal Credit Union , your money is always safe. The National Credit Union Administration (NCUA) insures all deposits up to $250,000. To help credit unions members know how its share insurance rules apply, what’s insured and what might exceed coverage, the National Credit Union Administration’s (NCUA) provides a Share Insurance Estimator. Give it a go if you have questions about the insurability of your shares.