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Is My Money Safe in the Bank in 2023?

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Is My Money Safe in the Bank?

Is my money safe in the bank in 2023? 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

Bank Failures 2023: Will Collapse Affect Housing Market?

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Bank Failures

The year 2023 has been marked by a series of bank failures, leaving many to wonder what the impact of these failures will be on the housing market and the wider economy. Bank failures have been a common occurrence throughout history, often causing ripples throughout the economy. The housing market, in particular, is vulnerable to the effects of bank failures.

The 2008 financial crisis, which saw a large number of banks fail, is still fresh in the minds of many homeowners and investors. The collapse of banks can have a significant impact on the housing market. One of the primary ways that banks influence the housing market is through their role in real estate lending.

Banks provide loans to individuals and businesses for property purchases, which fuels the housing market. When banks fail, there is often a reduction in lending, which can slow down the housing market. The impact of bank failures on the housing market can be seen in the 2008 financial crisis. Many banks failed, and there was a significant reduction in lending. This caused the housing market to crash, and many homeowners found themselves underwater on their mortgages. The resulting foreclosures caused a glut of homes on the market, further depressing prices.

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

In addition to the housing market, bank failures can also have a broader impact on the economy. Banks are an essential part of the financial system, and when they fail, it can lead to a reduction in lending across the board. This can slow down business investment, which can lead to a recession. The failure of banks can also cause a loss of confidence in the financial system. When people lose faith in the banking system, they may withdraw their savings, causing a run on the bank. This can further exacerbate the bank's financial problems and lead to more failures.

Bank Failures in 2023 – SVB, Signature Bank, First Republic Bank

The recent failures of banks such as Silicon Valley Bank (SVB) and Signature Bank may raise concerns about the stability of the real estate industry, particularly in terms of lending. However, it is important to note that these individual bank failures are unlikely to cause a widespread crash like the one that occurred in the 2008 financial crisis. The real estate industry has undergone significant changes and improvements in risk management and regulatory oversight since then, which have helped to mitigate the potential for large-scale collapse.

Two banks, Silicon Valley Bank (SVB) and Silvergate, collapsed for radically different reasons within 48 hours. Silvergate failed due to taking deposits and investing in cryptocurrencies. As cryptocurrency values fell, they didn’t have the liquidity to pay depositors as they withdrew their money. On the other hand, SVB invested in US Treasuries, which are considered a “safe asset”, but their maturities mismatched their deposits. SVB bought longer-term treasuries, leading to declining bond prices as yields rose.

Furthermore, as rates increased, speculative investments in startups declined, leading to young companies withdrawing funds for payroll/operating expenses. The SVB failure was a classic bank run where a few got nervous about SVB and rapidly withdrew their funds while SVB assets had declined due to rising yields and a lack of liquidity.

Bank Failures in 2023
Source: FDIC

Both failures are classic errors that regulators should have caught. The regulators are always focusing on the last crisis rather than evaluating how much the economy has changed. Investing in cryptocurrencies should not have been allowed by an FDIC-insured bank as these are not “marketable securities”.

Furthermore, not catching a mismatch in the maturities of their assets is an elementary mistake in finance. Unfortunately, many more “failures” of banks and other financial institutions are expected to occur due to rising interest rates, which will lead to more stress in the economy and on financial institutions.

On the commercial side, look for a continued pullback in getting new deals closed. With cap rates rising, values are not matching rents yet. There will be a need for a rapid repricing of commercial assets that could put the next round of financial institutions under stress. Residential is not totally immune. As banks fail and/or get nervous, underwriting will continue increasing, making it harder to get a loan funded.

As the easy money over the last decade quickly comes to an end, things will begin “breaking” in the economy. The two recent failures are just the beginning and not isolated events. They are indicative of systematic risk in the financial system that has yet to be identified.

Signature Bank, a New York-based bank known for its involvement in the cryptocurrency industry also failed in 2023. Regulators shut down the bank on March 12, 2023, two days after the collapse of Silicon Valley Bank. The sudden failure was reportedly caused by a run on deposits after Signature Bank customers were spooked by the collapse of Silicon Valley Bank, which prompted panicked withdrawals totaling more than $10 billion.

The run on deposits was triggered by Signature Bank's involvement in the cryptocurrency industry, which was also linked to the collapse of FTX in December 2022. Signature Bank's involvement in cryptocurrency, which accounted for 15-20% of the bank's deposits, was seen as a major contributing factor to its failure.

The bank had reportedly planned to shed as much as $10 billion in deposits from digital-asset clients to reduce its exposure to the volatile cryptocurrency market. However, the collapse of Silicon Valley Bank and the subsequent run-on deposits made it impossible for Signature Bank to continue operating.

Signature Bank's failure was the third-largest bank failure in U.S. history, with nominal assets at the time of failure of $210 billion. The collapse of Signature Bank and Silicon Valley Bank has raised concerns about the stability of the banking system and the impact of bank failures on the housing market and other sectors of the economy.

In terms of the impact on the real estate industry, the failure of these banks has had a limited effect, as the real estate market is not directly tied to the cryptocurrency market. However, there are some indirect impacts that are worth considering.

One potential impact is on the availability of financing for real estate transactions. SVB and Silvergate were both lenders that provided financing to many businesses, including those in the real estate industry. With their failures, there is now less lending capacity in the market, which could make it harder for some real estate developers and investors to secure financing.

However, this is unlikely to lead to a crash in the real estate market. The real estate market is a large and diverse market, with many different types of buyers, sellers, and investors. While the availability of financing can have an impact on certain segments of the market, it is unlikely to cause a widespread collapse.

Furthermore, the failure of SVB, Silvergate, and Signature is not indicative of a broader trend in the banking industry. While some banks may have exposure to the cryptocurrency market, most banks are well-capitalized and well-regulated and are not at risk of failure.

There are several reasons why the recent events, such as the failures of Silicon Valley Bank and Silvergate, are unlikely to cause a crash like the one that occurred in the 2008 financial crisis.

Firstly, the current real estate market is fundamentally different from the market in 2008. Prior to the 2008 crash, there was an oversupply of homes and an increasing number of homeowners who were unable to make their mortgage payments. This led to a large number of foreclosures, which further exacerbated the oversupply issue.

Today, the market is characterized by a shortage of homes, which has resulted in increasing prices and competition among buyers. Additionally, mortgage lending standards have become stricter since the financial crisis, which has resulted in fewer risky loans being issued.

Secondly, the financial system has also undergone significant reforms since the 2008 crisis. Regulators have implemented new rules and regulations that have made the banking system more resilient and less prone to collapse. For example, banks are now required to hold more capital as a cushion against potential losses, and the Federal Reserve has established mechanisms to provide liquidity to the market during times of stress.

Lastly, recent events, such as the failures of Silicon Valley Bank and Silvergate, are relatively isolated incidents that are unlikely to have a significant impact on the broader real estate market. While these events may result in some short-term disruptions or market volatility, they are unlikely to trigger a broader collapse.

Overall, while there are always risks and uncertainties in any market, the current real estate market is fundamentally different from the market that existed prior to the 2008 financial crisis, and the financial system has become more resilient and better equipped to weather potential shocks. Therefore, it is unlikely that the recent events, such as the failures of Silicon Valley Bank and Silvergate, will cause a crash like the one that occurred in 2008.

Recent First Republic Bank Failure in May 2023

First Republic Bank, which catered to a wealthy clientele and grew rapidly through deposits, has become the second large regional bank with assets over $200 billion to fail in just a few weeks, following Silicon Valley Bank. What caused First Republic Bank to fail? According to analysts, the bank's business model left it susceptible to a sudden rise in interest rates, which eroded the value of its large loans, including jumbo mortgages and led to withdrawals of deposits from fearful clients.

As a result, the bank had to sell off unprofitable assets and lay off up to a quarter of its workforce, but these measures were seen as too little, too late. Eventually, the bank had to be seized by the government and sold to JPMorgan Chase, with its stockholders wiped out.

While the depositors are protected by the FDIC's insurance fund, which could take a $13 billion estimated loss as a result of First Republic's failure, the stockholders are at the very end of the line and are likely to lose their investments. This outcome was deemed acceptable by President Joe Biden, who noted that taxpayers were not on the hook for the bank seizure. However, for those who invested in First Republic Bank, the collapse is a painful reminder of the risks and uncertainties of the financial market.

List of Failed Banks: 2019-2023

A Sunday bank failure is an extremely rare occurrence. Signature Bank failed on Sunday, marking only the sixth time a Federal Deposit Insurance Corp. (FDIC) bank failed on a Sunday, according to Bankrate’s analysis of FDIC data. It was also the first Sunday bank failure since 1991.

First Republic Bank, a regional bank with assets over $200 billion, recently failed, becoming the second large regional bank to do so in just a few weeks. The bank, which catered to a wealthy clientele, grew deposits rapidly but was susceptible to a sudden rise in interest rates.

After the collapse of Silicon Valley Bank and Signature Bank, investors have been wondering who’s next. In this blog post, we will discuss the collapse of First Republic Bank, its causes, and what the future might hold for other banks.

Failed banks Date closed
First Republic Bank 05/01/2023
Signature Bank, New York 03/12/2023
Silicon Valley Bank, Santa Clara, Calif. 03/10/2023

 

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

Impact of Bank Collapse on the Housing Market

The recent failures of Silicon Valley Bank, Silvergate, and Signature Bank have raised concerns about the stability of the real estate industry, particularly in terms of lending. While individual bank failures are unlikely to cause a widespread crash, they can have a significant impact on the housing market, and the wider economy.

One of the primary ways that banks influence the housing market is through their role in real estate lending. Banks provide loans to individuals and businesses for property purchases, which fuels the housing market. When banks fail, there is often a reduction in lending, which can slow down the housing market.

The collapse of banks can also have a broader impact on the economy. Banks are an essential part of the financial system, and when they fail, it can lead to a reduction in lending across the board. This can slow down business investment, which can lead to a recession. The failure of banks can also cause a loss of confidence in the financial system. When people lose faith in the banking system, they may withdraw their savings, causing a run on the bank. This can further exacerbate the bank's financial problems and lead to more failures.

The failures of Silicon Valley Bank and Silvergate were due to different reasons. Silvergate failed due to taking deposits and investing in cryptocurrencies, and SVB invested in US Treasuries with maturities that mismatched their deposits. The failures of these banks were avoidable, and regulators should have caught them. Unfortunately, many more “failures” of banks and other financial institutions are expected to occur due to rising interest rates, which will lead to more stress in the economy and on financial institutions.

Signature Bank's involvement in the cryptocurrency industry, which accounted for 15-20% of the bank's deposits, was seen as a major contributing factor to its failure. Signature Bank's collapse and Silicon Valley Bank's failure raised concerns about the stability of the banking system, which could lead to a loss of confidence in the system.

The impact of bank failures on the housing market can be seen in the 2008 financial crisis. Many banks failed, and there was a significant reduction in lending. This caused the housing market to crash, and many homeowners found themselves underwater on their mortgages. The resulting foreclosures caused a glut of homes on the market, further depressing prices. As the easy money over the last decade quickly comes to an end, things will begin “breaking” in the economy. The recent failures are just the beginning and not isolated events. They are indicative of systematic risk in the financial system that has yet to be identified.

Therefore, bank failures can have a significant impact on the housing market and the wider economy. The failures of Silicon Valley Bank, Silvergate, and Signature Bank have raised concerns about the stability of the banking system and could lead to a loss of confidence in the system. It is essential that regulators identify and address systematic risks in the financial system to avoid future bank failures and prevent the adverse effects they can have on the economy.

Which Banks Are in Danger of Failing or Collapse?

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Which Banks Are in Danger of Failing or Collapse

Recently, 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.

ALSO READ: Is Bank of America Safe From Collapse or Trouble?

The Risk of 186 Bank Failures in 2023

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.

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

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.

ALSO READ: List of Failed Banks in the United States 

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.

ALSO READ: Banking Crisis Explained: Causes of Bank Collapse & its Prevention

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

Silicon Valley Bank Failure in 2023

Silicon Valley Bank, once a prominent player in the banking industry, collapsed after struggling to cope with rising yields that eroded the value of its assets. The bank was shut down by Californian regulators, and the FDIC was appointed as the receiver. This marks the largest bank failure since the financial crisis of 2008 when Washington Mutual went bust.

Silicon Valley Bank attempted to recover from its losses by selling a portfolio of treasuries and mortgage-backed securities to Goldman Sachs at a loss of $1.8 billion. However, it failed to raise $2.25 billion in common equity and preferred convertible stock to plug the hole. The bank's clients became increasingly worried and withdrew their deposits, causing $42 billion in outflows in just one day.

In an attempt to salvage its businesses, Silicon Valley Bank announced earlier this week that it was exploring strategic alternatives for its holding company, SVB Capital, and SVB Securities. The company said that SVB Securities and SVB Capital's funds and general partner entities were not included in the Chapter 11 filing. The company added that it planned to proceed with the process to evaluate alternatives for its businesses, as well as its other assets and investments.

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 in 2023: Why it Can’t Crash Real Estate?

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

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/

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?

The stability of the banking industry has come under scrutiny recently with the failure of First Republic Bank. It was the second-largest bank failure in the country, and instead of a federal bailout, JP Morgan Chase took over its assets. This deal makes Chase an even bigger bank than it already was. The situation has led to questions about the stability of the banking industry, especially as it marks the third bank failure in two months.

On April 13, 2023, the California Department of Financial Protection and Innovation closed First Republic Bank, San Francisco, California, due to financial instability. The Federal Deposit Insurance Corporation (FDIC) was appointed as the receiver, and to protect depositors, it entered into a purchase and assumption agreement with JPMorgan Chase Bank, National Association, Columbus, Ohio, to assume all of the deposits and most of the assets of First Republic Bank.

Acquisition of Deposits and Assets

JPMorgan Chase Bank, National Association, submitted a bid for all of the deposits of First Republic Bank and agreed to purchase most of its assets. As a result, all depositors of First Republic Bank became depositors of JPMorgan Chase Bank, National Association, with full access to all their deposits. The FDIC insured the deposits, and customers did not need to change their banking relationship to retain their deposit insurance coverage up to applicable limits.

Branches and Systems Changes

As part of the agreement, First Republic Bank’s 84 offices in eight states reopened as branches of JPMorgan Chase Bank, National Association, during normal business hours. Customers of First Republic Bank were advised to continue using their existing branch until they received notice from JPMorgan Chase Bank, National Association, that it had completed systems changes to allow other JPMorgan Chase Bank, National Association, branches to process their accounts as well.

Loss-Share Transaction

JPMorgan Chase Bank, National Association, also entered into a loss-share transaction with the FDIC on single family, residential, and commercial loans it purchased from First Republic Bank. Under the agreement, the FDIC and JPMorgan Chase Bank, National Association, will share in the losses and potential recoveries on the loans covered by the loss-share agreement. The transaction is expected to maximize recoveries on the assets by keeping them in the private sector and minimize disruptions for loan customers.

Qualified Financial Contracts

JPMorgan Chase Bank, National Association, will also assume all Qualified Financial Contracts of First Republic Bank, which include derivatives and repurchase agreements.

Least-Cost Resolution

The resolution of First Republic Bank involved a highly competitive bidding process and resulted in a transaction consistent with the least-cost requirements of the Federal Deposit Insurance Act. The FDIC estimated that the cost to the Deposit Insurance Fund would be about $13 billion. However, the final cost will be determined when the FDIC terminates the receivership.

READ: List of Failed Banks in the United States

Potential Reasons for the Banking Failures

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/

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