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Is My Money Safe in the Bank in 2025?

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Is my money safe in the bank in 2025? In recent times, people have become increasingly concerned about the safety of their money, especially after the collapse of financial institutions such as the Silicon Valley Bank (SVB). If you are one of those people, you may be wondering if your money is safe after the SVB collapse. This article aims to address your concerns by providing a comprehensive analysis of the situation.

The Silicon Valley Bank was a financial institution that provided banking services to tech companies and startups. The collapse of the Silicon Valley Bank in 2023 was a harsh reminder that even the most reputable financial institutions can experience difficulties. The Silicon Valley Bank was known for providing banking services to tech companies and startups and was considered a key player in the industry.

The fallout from the bank's collapse was significant, with many customers losing their savings and investments. This event underscores the importance of selecting a bank that is reputable and trustworthy. Customers must conduct thorough research on the bank's history, financial health, and regulatory compliance. It's crucial to ensure that the bank is FDIC insured, which provides an added layer of protection for deposit accounts.

Is My Money Safe in the Bank: FDIC Insurance Coverage?

The Federal Deposit Insurance Corporation (FDIC) is a government agency that provides insurance coverage to depositors in case of bank failures. FDIC insurance coverage guarantees up to $250,000 per depositor, per insured bank, for each account ownership category. This means that if you have multiple accounts with the same bank, each account is insured separately up to $250,000.

If you had deposits in the SVB, you may be wondering if your money is covered by FDIC insurance. The Federal Deposit Insurance Corporation (FDIC) has taken action to protect all depositors of the former Silicon Valley Bank in Santa Clara, California, which was closed by the California Department of Financial Protection and Innovation on March 10, 2023, and the FDIC was appointed receiver.

ALSO READ: Which Banks Are in Danger of Failing or Collapse 2023

The FDIC transferred all deposits – both insured and uninsured – and substantially all assets of the bank to a newly created, full-service FDIC-operated ‘bridge bank' to protect all depositors of Silicon Valley Bank. Depositors will have full access to their money beginning this morning when Silicon Valley Bridge Bank, N.A. opens, and borrowers will automatically become customers of the bridge bank.

The transfer of all deposits was completed under the systemic risk exception approved on March 28, 2023, and all depositors of the institution will be made whole, but shareholders and certain unsecured debt holders will not be protected, and senior management has been removed.

The receiver for Silicon Valley Bank has also transferred all Qualified Financial Contracts of the failed bank to the bridge bank. The bridge bank structure is designed to bridge the gap between the failure of a bank and the time when the FDIC can stabilize the institution and implement an orderly resolution. The FDIC named Tim Mayopoulos as CEO of Silicon Valley Bridge Bank, N.A.

What Types of Bank Accounts Are Protected?

The FDIC (Federal Deposit Insurance Corporation) insures certain types of bank accounts in the United States to protect depositors in case of bank failures or financial problems. FDIC insurance is automatically provided to depositors at FDIC-insured banks and savings institutions, meaning depositors don't have to take any additional steps to receive this protection.

The types of accounts that are covered by FDIC insurance include checking accounts, Negotiable Order of Withdrawal (NOW) accounts, savings accounts, money market deposit accounts (MMDA), time deposits such as certificates of deposit (CDs), cashier’s checks, money orders, and other official items issued by a bank. These accounts are insured up to $250,000 per depositor, per bank, for each account ownership category.

Additionally, there is also coverage for certain types of retirement accounts and benefit plans, including single accounts, certain retirement accounts like IRAs, self-directed defined contribution plans, and self-directed 401(k) plans, as well as revocable and irrevocable trust accounts, employee benefit plan accounts, corporation/partnership/unincorporated association accounts, and government accounts.

However, not all types of investments are insured by the FDIC. For example, stock investments, bond investments, mutual funds, crypto assets, life insurance policies, annuities, municipal securities, safe deposit boxes, or their contents, and Treasury bills, bonds, or notes are not covered by FDIC insurance. It's important for depositors to be aware of what types of accounts and investments are covered by FDIC insurance and what types are not, so they can make informed decisions about where to put their money.

How to Ensure Your Money is Safe From Bank Failure?

Bank failure can be a daunting thought for anyone who has money in a bank. It is important to take steps to protect your money in case of a bank failure. The good news is that there are several ways to protect your money from bank failure.

First and foremost, it is essential to choose a bank that is insured by the Federal Deposit Insurance Corporation (FDIC). The FDIC insures deposits up to $250,000 per depositor, per insured bank. This means that if your bank fails, you can still get your money back up to the insured amount. It is important to note that not all banks are insured by the FDIC, so it is important to verify the insurance status of your bank before opening an account.

ALSO READ: List of Failed Banks in the United States

In addition to choosing an FDIC-insured bank, it is also important to keep your deposits within the insurance limit. Deposits that exceed the FDIC insurance limit are not insured and will not be returned in the event of a bank failure. If you have more than $250,000 to deposit, you may consider spreading your money across multiple banks to stay within the insurance limit.

Another way to protect your money from bank failure is to diversify your deposits. Rather than keeping all your money in one account, you can consider opening multiple accounts with different banks. This can help you spread your risk and ensure that you are not putting all your eggs in one basket. By diversifying your deposits, you can also take advantage of higher interest rates or better account terms offered by different banks.

It is also important to monitor the health of your bank. Banks are required to provide quarterly financial reports to the FDIC, which are publicly available. You can review these reports to get a sense of the financial health of your bank. If you see any red flags or warning signs, you may want to consider moving your money to a more stable bank.

Another way to protect your money is to maintain accurate records of your deposits. This can include keeping track of your account balances, interest rates, and transaction history. By doing so, you can quickly identify any discrepancies or errors in your account and take action to correct them.

In the event of a bank failure, it is important to stay informed and take action quickly. The FDIC will typically step in to take over the failed bank and transfer deposits to a new bank. However, this process can take time, and there may be a period when you do not have access to your funds. It is important to have alternative sources of funds available, such as cash or credit cards, to cover your expenses during this time.

How to Tell if Your Money is Safe in the Bank?

Checking the health of your bank is an important step in protecting your money. By doing so, you can ensure that your bank is financially stable and able to safeguard your deposits. One way to check the health of your bank is by utilizing the data and statistics provided by the Federal Deposit Insurance Corporation (FDIC).

The FDIC provides a wealth of information on the financial health of banks across the United States. This includes data on a bank's assets, deposits, loans, and other financial metrics. By reviewing this data, you can get a clear picture of your bank's financial standing and assess its ability to keep your money safe.

In addition to utilizing the FDIC's data and statistics, there are other indicators you can look at to determine the health of any bank. These include factors such as the bank's capitalization, liquidity, and profitability. Here are all the indicators that can be used to determine the health of a bank.

  1. Capital adequacy ratio: This ratio measures a bank's ability to absorb losses. A bank with a high capital adequacy ratio is considered to be financially strong and able to withstand economic downturns.
  2. Asset quality: This refers to the quality of a bank's loan portfolio. A bank with a high percentage of non-performing loans is considered to be at risk of failure.
  3. Liquidity: A bank's ability to meet its short-term obligations is an important indicator of its health. If a bank is unable to meet its obligations, it may be forced to borrow funds at a high cost or sell assets at a loss.
  4. Profitability: A bank's profitability is a key indicator of its long-term viability. A bank that consistently generates profits is more likely to be financially stable.
  5. Efficiency: A bank's efficiency ratio measures its expenses as a percentage of its revenue. A bank with a high-efficiency ratio may be less profitable and less efficient in its operations.
  6. Management quality: The quality of a bank's management team can also be a good indicator of its health. A bank with experienced and knowledgeable managers is more likely to make sound decisions and avoid risky investments.
  7. Market share: A bank's market share can also provide some indication of its health. Banks with a large market share are often more stable and able to weather economic storms.
  8. Regulatory compliance: A bank's compliance with regulatory requirements is also important. Banks that consistently violate regulations may be at risk of being shut down or facing legal action.

In conclusion, the collapse of the Silicon Valley Bank has left many customers wondering if their money is safe. While bank failures are a rare occurrence, it is always better to be safe than sorry. It is important to understand how banks work and how to protect your money in case of a bank failure. By checking the health of your bank and staying informed of any changes in its financial status, you can ensure that your money is safe.

Remember, the FDIC offers a wealth of information on banks, including data and statistics that can help you determine the health of your bank. It is always a good idea to periodically review your bank's financial information and compare it to industry benchmarks to ensure that it is operating in a safe and sound manner.

By taking a few simple steps, you can protect your money from bank failure and ensure that it remains safe and secure. Don't wait until it's too late – start taking proactive steps today to safeguard your hard-earned money.

References:

  • https://www.fdic.gov/news/press-releases/2023/pr23019.html
  • https://www.fdic.gov/analysis/quarterly-banking-profile/statistics-at-a-glance/
  • https://www.fdic.gov/resources/deposit-insurance/financial-products-insured/index.html

Which Banks Are in Danger of Failing or Collapse (2024)

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The past year has seen a shakeup in the financial world, with several prominent bank failures raising concerns about the stability of the banking sector in 2024. There were 567 bank failures from 2001 through 2024. While predicting specific institutions in danger of collapse is difficult, we can explore the current climate and identify potential risk factors.

The collapses of Silicon Valley Bank, Signature Bank, and others in 2023 sent shockwaves through the industry. These failures were attributed to a combination of factors, including:

  • Unrealized Investment Losses: Banks hold investment securities, and significant drops in their value can erode a bank's capital base.
  • Overreliance on Uninsured Deposits: Deposits exceeding FDIC insurance limits leave banks more vulnerable if a crisis triggers a run on deposits.

The Federal Deposit Insurance Corporation (FDIC) maintains a list of failed banks [FDIC Failed Bank List], which serves as a reference point for past events.

186 Banks Are in Danger of Failing?

A report posted on the Social Science Research Network found that 186 banks in the United States are at risk of failure or collapse due to rising interest rates and a high proportion of uninsured deposits.

The report titled ‘Monetary Tightening and US Bank Fragility in 2023: Mark-to-Market Losses and Uninsured Depositor Runs?' estimated the market value loss of individual banks' assets during the Federal Reserve's rate-increasing campaign.

The study also examined the proportion of banks' funding that comes from uninsured depositors with accounts worth over $250,000. This blog post aims to explore the implications of the report and why it matters to buyers and sellers.

According to the report, if half of the uninsured depositors quickly withdrew their funds from these 186 banks, even insured depositors may face impairments as the banks would not have enough assets to make all depositors whole. This could potentially force the Federal Deposit Insurance Corporation (FDIC) to step in.

The failure of Silicon Valley Bank serves as an example of the risks posed by rising interest rates and uninsured deposits. The bank's assets lost value due to the rate increases and worried customers withdrew their uninsured deposits. As a result, the bank failed to meet its obligations to its depositors and was forced to close.

The report noted that “Even if only half of the uninsured depositors decide to withdraw, almost 190 banks are at potential risk of impairment to insured depositors, with potentially $300 billion of insured deposits at risk. If uninsured deposit withdrawals cause even small fire sales, substantially more banks are at risk.” The economists who conducted the study warned that these 186 banks are at risk of a similar fate without government intervention or recapitalization.

Number of FDIC-Insured Institutions on the “Problem Bank” List

The number of FDIC-insured institutions on the “Problem Bank” list has continued to decline over the years. In 2012, there were 651 problem banks, which decreased to 467 in 2013, 291 in 2014, and 183 in 2015. The trend continued with 123 problem banks in 2016, 95 in 2017, and 60 in 2018. By the end of 2019, there were 51 problem banks, and the number slightly increased to 56 in 2020. However, in 2021, the number dropped to 44. Looking ahead to 2022, the number of problem banks continued to decline, reaching 39 by the end of the year. This decline in problem banks is a positive trend for the banking industry and the economy as a whole.

Month/Year  Number of Problem Banks
12/12 651
12/13 467
12/14 291
12/15 183
12/16 123
12/17 95
12/18 60
12/19 51
12/20 56
12/21 44
12/22 39

As of 2023, the latest available data on the number of FDIC-insured institutions on the “Problem Bank” list is for the year-end 2022. According to the FDIC's reports, the number of problem banks continued to decline, reaching 39 by the end of 2022. This is a positive trend for the banking industry, indicating its stability and resilience amidst various economic challenges. The banking industry will continue to face risks and uncertainties, but the decreasing trend in problem banks demonstrates the effectiveness of the regulatory framework in ensuring the safety and soundness of the financial system.

Number of FDIC-Insured Institutions on the "Problem Bank" List

Monthly List of Banks Examined for CRA Compliance – June 2024

The Monthly List of Banks Examined for CRA Compliance is a list issued by the Federal Deposit Insurance Corporation (FDIC) that provides information on state nonmember banks that have been recently evaluated for compliance with the Community Reinvestment Act (CRA). The list is issued monthly and includes the names of banks that have been examined for CRA compliance, along with the date of the examination.

The list is used by regulators, community organizations, and the public to monitor the performance of banks in meeting the credit needs of their communities. The list is also used by banks to assess their own performance and to identify areas where they need to improve. The list is available on the FDIC website and can be accessed by the public.

You can access the list here – Monthly List of Banks Examined for CRA Compliance

Banks are examined for CRA compliance every 12 to 36 months, depending on their asset size and rating. The examination frequency schedule used by the FDIC incorporates changes required by the Gramm-Leach-Bliley Act of 1999 (GLBA). Banks with assets greater than or equal to $250 million may be examined in advance of the examination mandate date since the GLBA frequency requirements do not apply to them.

Banks with assets of $250 million or less and a “Satisfactory” CRA rating are subject to a CRA examination no more than once every 48 months, while those with a “Needs to Improve” or “Substantial Noncompliance” rating are examined every 12 months. Banks with an “Outstanding” or “Satisfactory” rating of 1 or 2 are examined every 36 months, while those with a rating of 3, 4, or 5 are examined every 12 months.

The OCC conducts a CRA examination of a national bank every three years. The FDIC issues a Monthly List of Banks Examined for CRA Compliance, which includes the names of banks that have been examined for CRA compliance, along with the date of the examination.

Potential Impact of Such Bank Failures

The findings of the report highlight the importance of careful risk management and diversification of funding sources for banks to ensure their stability in the face of market fluctuations. Buyers and sellers of banking assets should carefully evaluate the risks associated with uninsured deposits and the potential impact of rising interest rates on bank assets.

The failure of Silicon Valley Bank serves as a cautionary tale for the banking industry, and it is essential to take proactive steps to mitigate the risks posed by these factors. The government may also need to step in to prevent a similar fate for the 186 banks identified in the report.

The potential impact of nearly 200 banks being at risk for the same fate as Silicon Valley Bank could be significant for the banking sector and the broader economy. If a large number of these banks were to fail, it could lead to a domino effect, causing other banks to fail as well. This could lead to a credit crunch, making it difficult for businesses and consumers to access credit and slowing economic growth.

In addition, a bank run on one of these vulnerable institutions could cause a ripple effect, causing depositors to withdraw funds from other banks as well. This could lead to a broader panic and a loss of confidence in the banking system as a whole, potentially leading to a recession or even a financial crisis. The federal government's promise to back all depositors in these banks is a step in the right direction to help prevent a wider panic.

However, this may not be enough to prevent a bank run if customers believe that the bank is insolvent. It is important for regulators and policymakers to monitor the situation closely and take action to prevent further bank failures. This could include recapitalizing vulnerable banks or providing government guarantees to support their operations. Overall, the situation highlights the importance of a stable banking system and the need for effective risk management practices in the financial sector.

ALSO READ:

Bank Failures: Why it Can’t Crash Real Estate?

Is Bank of America Safe From Collapse or Trouble?

Signature Bank Failure 2023: FDIC Plans to Sell its Housing Loans

List of Failed Banks in the United States 

Banking Crisis Explained: Causes of Bank Collapse & its Prevention

Sources:

  • https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4387676
  • https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/2022dec/chartdif2.xlsx
  • https://www.businesstoday.in/industry/banks/story/186-us-banks-at-risk-of-failure-similar-to-silicon-valley-bank-says-research-heres-why-373895-2023-03-18

Recent Bank Failures in 2023 and 2024: Causes & Effects

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The banking sector in the United States has witnessed a series of bank failures from 2023 to 2024, events that have stirred discussions and concerns among investors, customers, and regulators alike. This blog post aims to provide an informational overview of the recent bank failures, their implications, and the measures taken by regulatory bodies to manage these situations.

Recent Bank Failures in 2023 and 2024

The Wave of Bank Failures in 2023

The year 2023 saw a total of five bank failures, a number that is considered low compared to historical data. However, the size and circumstances of these failures were significant. The collapse of Silicon Valley Bank (SVB) on March 10, 2023, followed by Signature Bank on March 12, and First Republic Bank on May 1, marked some of the largest bank failures in US history.

These institutions primarily served wealthy customers and startups, with a considerable portion of deposits exceeding the FDIC insurance limit of $250,000.

Following the collapse of these larger banks, two smaller regional banks also failed: Heartland Tri-State Bank in July and Citizens Bank of Sac City in November 2023. These failures highlighted the vulnerabilities of smaller institutions in a challenging economic environment. Here are the recent bank failures in 2023 as listed by FDIC.

The Lone Bank Failure of 2024

As of late April 2024, there has been only one bank failure: Republic First Bank. This suggests a relative stabilization in the banking sector, although it is important to remain vigilant as economic conditions evolve.

List of Recently Failed Banks from 2019-2024

Failed banks Date closed
Republic First Bank April 26, 2024

 

Failed banks Date closed
Citizens Bank, Sac City, IA November 3, 2023
Heartland Tri-State Bank, Elkhart, KS July 28, 2023
First Republic Bank, San Francisco, CA May 1, 2023
Signature Bank, New York, NY March 12, 2023
Silicon Valley Bank, Santa Clara, CA March 10, 2023

 

Failed banks Date closed
Almena State Bank, Almena, Kan. 10/23/2020
First City Bank of Florida, Fort Walton Beach, Fla. 10/16/2020
The First State Bank, Barboursville, W.Va. 04/03/2020
Ericson State Bank, Ericson, Neb. 02/14/2020

 

Failed banks Date closed
City National Bank of New Jersey, Newark 11/1/2019
Resolute Bank, Maumee, Ohio 10/25/2019
Louisa Community Bank, Louisa, Ky. 10/25/2019
The Enloe State Bank, Cooper, Texas 05/31/2019

Causes of Recent Bank Failures in the U.S.

The recent spate of bank failures in the United States from 2023 to 2024 has been attributed to a confluence of factors that have put considerable stress on financial institutions.

Here's an exploration of the primary causes that led to the collapse of these banks:

Commercial Real Estate Loans and Interest Rate Hikes

A significant factor contributing to the bank failures was the exposure to commercial real estate loans coupled with the impact of rising interest rates. Many banks, especially smaller ones with assets under $10 billion, faced the dual threat of potential losses from these loans and the broader economic effects of higher interest rates. These conditions created a precarious situation where the value of the banks' assets could rapidly decline, leaving them vulnerable to insolvency.

Withdrawals and Underwater Bond Portfolios

Another critical issue was the mass withdrawal of deposits by customers, particularly at regional banks like Silicon Valley Bank and Signature Bank. Many of these customers were tech or crypto businesses that needed liquidity to cover losses or found better savings rates elsewhere. This situation was exacerbated by the fact that raised interest rates had already weakened the banks' balance sheets, reducing the value of their holdings in government bonds.

Regulatory Challenges and Risk Management

Regulatory oversights and failures in risk management also played a role. Some banks were unable to navigate the complex regulatory environment effectively or manage the risks associated with their investment and loan portfolios. This led to a lack of preparedness for the economic shifts that occurred, resulting in their eventual collapse.

The Role of Uninsured Deposits

A high proportion of uninsured deposits also contributed to the banks' vulnerability. When banks hold a significant amount of deposits that exceed the FDIC insurance limit, they risk losing the confidence of their depositors, which can trigger bank runs and lead to failure.

Economic and Market Instability

The broader economic and market instability also cannot be overlooked. Fluctuations in the market, changes in monetary policy, and economic downturns can all create an environment where banks are more likely to fail. The banks that collapsed were, in many cases, not prepared to withstand such economic pressures.

In summary, the collapse of these banks was not due to a single cause but rather a combination of several interconnected factors that affected their stability and solvency. It serves as a reminder of the importance of prudent risk management, regulatory compliance, and economic resilience in the banking sector.

ALSO READ: Which Banks Are in Danger of Failing or Collapse?

Regulatory Actions Being Taken to Prevent Bank Failures

Regulators have been proactive in implementing a series of measures aimed at preventing future collapses and ensuring the stability of the financial system. These measures are designed to address the various factors that contributed to the failures and to strengthen the resilience of banks against potential economic shocks. Here is an overview of the regulatory actions being taken:

Enhancing Capital Requirements

One of the primary measures is the enhancement of capital requirements for banks. Capital acts as a buffer against losses, and by increasing the minimum capital requirements, regulators aim to ensure that banks have a stronger financial foundation. This move is expected to help banks absorb unexpected shocks and reduce the likelihood of failure.

Stricter Risk Management Guidelines

Regulators have also implemented stricter risk management guidelines, including stress testing and enhanced risk assessment methodologies. These guidelines require banks to identify, measure, and manage risks in a proactive and comprehensive manner. By doing so, banks can detect potential vulnerabilities early and take corrective actions before they escalate into systemic risks.

Improving Transparency and Disclosure

Improving transparency and disclosure requirements is another critical step taken by regulators. Banks are now required to disclose more detailed information about their operations and financial positions. This increased transparency allows investors, regulators, and the public to make informed decisions and assess a bank's financial health more accurately, thereby reducing the likelihood of hidden risks and failures.

Regular Assessments and Reforms

Regulators are conducting regular assessments of the regulatory measures and their impact on bank stability. These assessments help identify gaps and inform necessary reforms. By embracing a proactive approach to regulatory oversight, regulators can stay ahead of potential threats and prevent future bank failures.

Addressing the Issue of Uninsured Deposits

The issue of uninsured deposits has also been addressed, with regulators considering policy options related to deposit insurance coverage levels, excess deposit insurance, and the implications for risk-based pricing and deposit insurance fund adequacy.

Reversing Regulatory Rollbacks

There have been calls for reversing the 2018 regulatory rollbacks that lifted certain prudential requirements for midsize banks. Reinstating these requirements would help ensure that banks are better equipped to handle financial pressures and maintain stability.

Comprehensive Reviews and Investigations

The Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) are conducting comprehensive reviews and investigations to understand the causes of the recent failures and to determine what actions can be taken to prevent similar occurrences in the future. These reviews are crucial for developing a deeper understanding of the crisis and for formulating effective preventive strategies.

The combination of these measures reflects a concerted effort by regulators to fortify the banking sector and protect it from future crises. While the effectiveness of these actions will be tested over time, they represent important steps toward a more robust and secure financial system.

The Impact of US Bank Failures on the Economy: Perspective

The series of bank failures in the United States during 2023 and 2024 has had a notable impact on the economy, with repercussions that extend beyond the banking sector.

Immediate Economic Repercussions

The immediate aftermath of the bank failures saw a ripple effect across financial markets. Investor confidence was shaken, leading to a drop in stock prices and an increase in market volatility. The failures of significant players like Silicon Valley Bank and Signature Bank caused particular concern due to their roles in financing tech and startup ecosystems, which are vital for innovation and economic growth.

Credit Availability and Business Operations

Credit availability tightened as a result of the bank failures. Banks became more cautious in their lending practices, which made it harder for businesses, especially small and medium-sized enterprises, to access the funds they needed to operate and expand. This credit squeeze could potentially slow down economic growth and lead to a reduction in job creation.

Consumer Confidence and Spending

Consumer confidence took a hit as news of the bank failures spread. Concerns about the safety of deposits, even though largely unfounded due to FDIC insurance, led to a more conservative approach to spending. Reduced consumer spending can have a dampening effect on economic growth since it accounts for a significant portion of economic activity.

Regulatory and Policy Implications

The bank failures prompted a swift response from regulators and policymakers. Measures to enhance the stability of the financial system were introduced, including stricter capital requirements and risk management protocols. While these measures are designed to prevent future failures, they also lead to increased compliance costs for banks, which could be passed on to consumers and businesses in the form of higher fees and interest rates.

Long-Term Economic Outlook

In the long term, the bank failures may lead to a restructuring of the banking industry, with a possible consolidation of smaller banks and a reevaluation of business models that rely heavily on specific sectors or customer bases. This consolidation could lead to a more resilient banking sector, but it also raises concerns about reduced competition and its impact on consumers.

Global Economic Considerations

The US bank failures also have global implications. As the world's largest economy, the stability of the US banking system is crucial for international financial markets. The failures could lead to a reassessment of risk by global investors and affect the flow of capital worldwide, with potential impacts on foreign exchange rates, international trade, and global economic stability.

Bank Failures on the Horizon: Powell Warns of Risks in Real Estate

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Powell Warns of Bank Failures

The stability of the banking sector is a critical component of the global financial system, and recent statements from the Federal Reserve (Fed) have highlighted concerns about potential bank failures. Federal Reserve Chair Jerome Powell, in his remarks to the Senate Banking Committee, indicated that some U.S. banks might fail in the coming months due to declining values and defaults in their commercial real estate loan portfolios.

Factors Contributing to Expectations of Bank Failures

This expectation stems from several factors that have put pressure on the banking industry. One significant issue is the high concentration of commercial real estate loans, particularly in office and retail spaces, which have been heavily impacted by the shift to remote work and the post-pandemic economic landscape. The Fed has identified banks with high concentrations in these areas as being at risk.

Another contributing factor is the increase in interest rates, which has made it more challenging to refinance commercial real estate debt. This situation is exacerbated by the higher vacancy rates and lower valuations for office buildings in major cities. The Fed's concern is primarily with small and midsized banks, as the exposure of the largest banks to these risks is relatively low.

Recent History and Response

The recent history of bank failures, such as those of First Republic Bank, Silicon Valley Bank, and Signature Bank, has shown that smaller banks are moving away from commercial real estate lending. This shift is a response to the failures and the changing economic conditions that have made such investments riskier.

The Federal Deposit Insurance Corp. (FDIC) reports that banks hold a substantial amount of residential mortgage debt, with community banks accounting for a significant portion of this debt. These banks are vital to the residential mortgage sector, and their stability is crucial for the overall health of the financial system.

Cautionary Note and Proactive Measures

The Fed's statements serve as a cautionary note for the banking sector and highlight the need for vigilance and proactive measures to mitigate these risks. It is a reminder that the banking industry is still navigating the challenges posed by the evolving economic environment and the long-term effects of the pandemic.

As the situation develops, it will be important to monitor the actions of bank regulators and the banking industry's response to these challenges. The Fed's expectations are not just predictions; they are a reflection of the current state of the banking sector and the need for continued attention to ensure its stability and resilience.

Bank Failures This Week: Is Banking Industry in Trouble?

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bank failures this week

The banking industry is a cornerstone of the global economy, facilitating the flow of capital and supporting businesses and individuals with their financial needs. However, the industry is not immune to challenges, and bank failures can cause significant disruptions in financial markets. In recent times, there have been reports of bank failures and acquisitions, raising concerns about the stability of the banking industry.

Let us explore the recent bank failures, the reasons behind them, and the impact they may have on the banking industry and the wider economy. Although not widespread, there are many banks that have made poor decisions with how they have invested their funds. The deposits they receive from their bank customers are the funds being invested, and many banks have invested in longer-term investments, such as treasuries. In the past year, the Federal Reserve has aggressively raised rates, causing the value of the treasuries held by banks to reduce.

Which Bank Failures Happened This Week?

Citizens Bank, Sac City, Iowa, has made headlines this week as it was closed by the Iowa Division of Banking. In response to this, the Federal Deposit Insurance Corporation (FDIC) was appointed as the receiver. Let's delve into the details of this recent bank closure.

To safeguard the interests of depositors, the FDIC entered into a Purchase and Assumption Agreement with Iowa Trust & Savings Bank, Emmetsburg, Iowa. This agreement involves Iowa Trust & Savings Bank assuming all of the deposits previously held by Citizens Bank. Furthermore, the two branches of Citizens Bank will reopen as branches of Iowa Trust & Savings Bank, ensuring that customers can access their accounts seamlessly.

READ: List of Failed Banks in the United States

During the transition period, depositors of Citizens Bank can access their money through various means, including writing checks or using ATM and debit cards. Checks drawn on the bank will continue to be processed, and loan customers are encouraged to make their payments as usual.

One key piece of information for depositors is that they will automatically become depositors of Iowa Trust & Savings Bank. This means that customers do not need to change their banking relationship to maintain their deposit insurance coverage.

As of September 30, 2023, Citizens Bank had approximately $66 million in total assets and $59 million in total deposits. Additionally, Iowa Trust & Savings Bank has agreed to purchase essentially all of the failed bank's assets.

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $14.8 million as a result of this bank closure. It's worth noting that this fund, established by Congress in 1933 and managed by the FDIC, is designed to protect the deposits at the nation's banks.

Citizens Bank's closure marks the fifth bank failure in the nation this year. Notably, the last bank failure in Iowa occurred on November 18, 2011, with the closure of Polk County Bank in Johnston, Iowa.

The closure of Citizens Bank and its subsequent acquisition by Iowa Trust & Savings Bank highlights the dynamic nature of the banking industry. Customers of Citizens Bank can expect a smooth transition without needing to change their banking relationship. The FDIC, through its diligent efforts, ensures the protection of depositors and the stability of the banking system. It's also a reminder of the vital role the Deposit Insurance Fund plays in safeguarding the nation's bank deposits.

Potential Reasons for the Banking Failures in 2023

Although not widespread, there are many banks that have made poor decisions with how they have invested their funds. The deposits they receive from their bank customers are the funds being invested, and many banks have invested in longer-term investments, such as treasuries. In the past year, the Federal Reserve has aggressively raised rates, causing the value of the treasuries held by banks to reduce.

Several reasons have been identified for the banking turmoil:

  • Large Deposits: Many of the banks under pressure have a large number of deposits that are too big to be insured by the Federal Deposit Insurance Corporation (FDIC). This makes them vulnerable to a run, where customers scramble for their money back, and a bank would be unable to deal with that demand.
  • Investments in Government Bonds: Investments made by investment banks in government bonds have lost value as the Federal Reserve has raised interest rates aggressively. This has led to a significant reduction in the value of these investments.
  • Exposure to Commercial Mortgages: Many lenders are exposed to commercial mortgages, which are becoming increasingly risky as the economy slows down. These mortgages are often made to businesses that are unable to repay their loans in a timely manner, resulting in higher levels of defaults and foreclosures.

Duration Problem with Balance Sheet Assets

The bank can hold these securities to maturity and receive the invested funds back. The problem comes up if the bank is short on covering customer deposits and must sell these investments. In doing so, the bank may take significant losses on these investments. Therefore, banks have a duration problem with their balance sheet on how they hold assets.

Banks that have been better managing their assets will be in a solid position, which may be the case when it comes to smaller community banks. These banks may be more invested in their local communities, which may be more sustainable. However, unfounded fears have led bank customers to move their deposits to the few megabanks, believing that they are safer as they are too big to fail. This reaction could have some negative consequences in smaller communities.

Tightening Credit and Economic Slowdown

The bank failures also create additional credit-tightening consequences. As the Federal Reserve continues to tighten, they create more strain on the banking sector. Perhaps it may be time for the Fed to pause on its aggressive tightening with its rate increases as it is beginning to impact many segments of the economy.

This past Wednesday, the Fed increased its overnight lending rates by another .25%. With the latest bank failure, this may be a strong signal that the Fed should pause on any future increases. The cumulative effect of the rate hikes over the past year will continue to slow the economy, bringing the current inflation rate lower.

No Further Contagion Amongst Regional Banks

These bank failures have little in common with what happened in the 2008 housing crisis. With these recent bank events, the hope is that there is no further contagion amongst regional banks. Fed Chairman Jerome Powell did state that the banking sector remains strong. However, new signs of banking turmoil have emerged following the failure of First Republic Bank.

The third bank failure in 2023 has raised concerns about the stability of other regional banks. Shares of several regional banks, including California-based PacWest and Western Alliance, have been hit hard, fueling fears of more bank failures. The situation has been worsened by Wall Street investors who are betting on a further decline in regional bank shares.

The current situation in the banking industry is uncertain, and the future remains unclear. While some regional banks may struggle in the short term, others are expected to remain stable. Smaller community banks, in particular, may be better positioned to weather the storm, as they are more invested in their local communities and have a more personal relationship with their customers.

In conclusion, the banking industry is currently facing a period of turmoil, with several bank failures and increasing concerns about the stability of the industry. However, it is important to note that not all banks are created equal, and some may be better positioned to weather the storm than others. Additionally, there are steps that can be taken to improve the stability of the industry, such as reducing the reliance on large deposits and investing in less risky assets.

Sources:

  • https://www.fdic.gov/news/press-releases/2023/pr23034.html
  • https://www.eptrail.com/2023/05/04/business-another-bank-failure-this-week/

New Senate Bill Targets Executive Compensation Amid Bank Failures

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The Senate Banking Committee recently achieved a significant milestone in response to this year's banking turmoil by approving a bipartisan bill in a 21-2 vote. The legislation, negotiated by Senate Banking Chair Sherrod Brown, Senator Tim Scott, and Senator Elizabeth Warren, aims to increase penalties for failed lenders' executives, enhance oversight of the Federal Reserve, and restrict megabank takeovers.

New Senate Bill Targets Executive Compensation Amid Bank Failures

A Reasonable Compromise

Despite recent tensions between Senator Brown and Senator Warren, the final bill represents a “reasonable compromise” according to Warren. The legislation received widespread support from progressives, conservatives, and moderates on the committee, making it the most viable option for revamping the banking system. Notably, only two Republicans, Senators Thom Tillis and Bill Hagerty, voted against the bill.

Senator Brown emphasized the bill's significance for consumers, the banking system, honest bankers, and the entire country. The compromise achieved by Brown and Scott focuses on executive mismanagement and regulatory supervision failures, aligning with President Joe Biden's call for strengthened executive accountability.

Gaining Traction in the House

While House Republicans have not pursued similar legislation, the bill's provisions related to oversight of the Federal Reserve have caught their attention. Representative Andy Barr introduced a similar bill in the House, and House Financial Services Chair Patrick McHenry has expressed a willingness to review the Senate bill. With the level of support garnered in the Senate, it becomes challenging for House Republicans to ignore the need for reform.

Empowering Regulators and Holding Executives Accountable

The bill negotiated by Senators Scott and Brown aims to empower regulators to hold executives of failed banks accountable. It introduces measures to claw back compensation, increase civil penalties, and enforce bans on executives working in the industry. The compromise bill builds upon Senator Warren's proposal, which had garnered substantial support from the Banking Committee. Republican Senator J.D. Vance played a crucial role in building GOP support for Warren's proposal.

The compromise bill features a less-stringent clawback approach than Warren's original plan, covering a period of two years rather than three. Additionally, the clawback is an option for regulators rather than a requirement. The bill's scope expanded further with bipartisan amendments that broaden the types of compensation subject to clawbacks, require public reporting on bank supervision practices, and establish new hurdles for the acquisition of failed banks by large institutions.

Industry Concerns and Future Challenges

The banking industry's response to the bill remains uncertain. Major trade associations have refrained from taking a public position, but the Bank Policy Institute, representing large U.S. lenders, expressed concerns about potential actions against executives who were not significantly involved in their banks' failures. The institute also highlighted potential challenges in talent recruitment for banks.

Despite industry concerns, Senator Brown assured that most bankers he had spoken to acknowledged the need for accountability in light of recent banking scandals. He emphasized that the bill's purpose is to hold executives accountable for their greed and incompetence, rather than tarnishing the entire banking industry.

Senator Tillis, one of the two Republicans who voted against the bill, voiced his concerns about the legislation being too expansive and potentially stifling innovation. As the bill progresses through the legislative process, it is likely to undergo further refinement and face additional challenges.

Sources:

  • https://www.politico.com/news/2023/06/21/senate-advances-post-svb-bank-crackdown-00102855
  • https://www.cbsnews.com/news/senate-bill-bank-ceos-svb-collapse/

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