Silicon Valley Bank’s announcement that it urgently needed to raise $2.25 billion sent shockwaves through the financial system.
Within days, regulators were forced to seize the bank in the second-largest bank collapse. Regulators closed Signature Bank just two days later – making it the third-largest bank collapse in America.
This weekend, Credit Suisse became the first “global systemically important” bank to be rescued since 2008. How common are bank failures, and should you be worried?
Bank Failures Are More Common Than You Think
Although the prevailing narrative was that Silvergate Capital was winding down its bank operations due to crypto investments and Silicon Valley Bank (SVB) was the bank of choice for startups and venture capitalists, bank failures are more common than you think.
John Dealbreuin, with Financial Freedom Countdown, analyzed the FDIC bank failure data and found 563 failures from 2001 through 2023. Georgia had 93 bank failures in that period, followed by Florida at 76 and Illinois at 69.
The breakdown of bank failures by the state is
- GA – 93
- FL – 76
- IL – 69
- CA – 42
- MN – 23
Banks can fail for various reasons, including undercapitalization, liquidity, safety and soundness, and fraud.
As deposits came in, SVB took the opportunity to invest heavily in debt like U.S. Treasuries and mortgage-backed securities. However, as the Federal Reserve began raising interest rates to counter inflation, the value of their fixed-income investments plummeted. Substantial unrealized losses jeopardized the bank’s capacity to meet unexpected liquidity needs.
Are More Banks in Trouble?
In Sep 2022, the Federal Reserve Bank of Kansas City highlighted the unrealized loss positions in community banks due to the rising interest rate environment. The declining tangible equity capital ratios could spell trouble for the smaller banks.
The report states, “At year-end 2021, only four community banks had tangible equity capital ratios below 5 percent. That number increased to 333 on June 30, 2022, indicating less ability to sustain economic shocks.”
This week’s dip in bank stocks illustrates a broader re-evaluation of what lies ahead for the sector, according to former Fed Governor Daniel Tarullo. “I think what’s happening here is this is an occasion for everybody to ask ‘what else is going on in the banking industry.”
Borrowing from the Federal Reserve’s discount window soared to an all-time high of $152.8 billion in the week ending March 15 – up dramatically from the previous week’s figure of just $4.58 billion.
Support for Community Banks
Although the knee-jerk reaction might be to move all funds to the larger banks, supporting smaller banks is a wise decision, as they are often more involved with the local community. These institutions can build relationships and better understand their customers’ needs than larger banking corporations.
For instance, many rural counties are home to agricultural banks that provide significant advantages for farmers in the local market. Roughly half of the 473 community banks headquartered in the Ninth District specialize in farmland and agriculture investing.
In addition, small businesses tend to receive more accessible services from these local establishments that they may not find at big-name financial institutions. At a macro level, it’s advantageous to have competition in all economic sectors, especially within the banking industry.
How To Protect Your Money
Stick to FDIC Limits
Although the joint statement by the Treasury, Federal Reserve, and FDIC fully protects all Silicon Valley Bank and Signature Bank depositors, staying within the FDIC limits is always best.
The FDIC insurance covers up to $250,000 per person, per bank and account type. This allows you to allocate your financial resources across various accounts without exceeding the insured limit.
When Treasury Secretary Yellen was asked if Americans should presume unlimited FDIC deposit insurance after government agencies stepped in to guarantee all deposits at SVB and Signature Bank responded, “A bank only gets that treatment if a majority of the FDIC board, a supermajority of the Fed board and I – in consultation with the president – determine that the failure to protect uninsured depositors would create systemic risk and significant economic and financial consequences.”
Diversify Your Stock and Bond Portfolio
Investing in stocks is great for building wealth, but it is prudent to be diversified. When a bank fails, the shareholders are wiped out as the stock goes to zero or is sold for pennies on the dollar.
In times of turmoil, the entire sector may come under pressure. Although the other regional banks have not yet collapsed, the stock market is worried about the growing losses on the bank balance sheets.
Portfolios should ideally be diversified across sectors, countries, and geographies.
Are We Done Yet?
Fifteen years ago, on March 16, 2008, the Federal Reserve took emergency action to prevent the collapse of Bear Stearns, an 85-year-old investment bank. This decisive intervention was expected to stave off a broader crisis of confidence in the financial system. Unfortunately, it was only the first domino to fall, and six months later, Lehman collapsed, triggering the Great Financial Crisis.
The flight of capital from the regional banks has continued to the Systemic Important Banks (SIBs). Per a joint statement by the Department of the Treasury, Federal Reserve, FDIC, and OCC, the most significant 11 U.S. banks deposited $30B into First Republic Bank (FRB) on March 16, 2003, to demonstrate the banking system’s resilience. However, the markets continued hammering the FRB stock with a 35% decline in price.
Central banks across the globe have taken action to enhance the provision of U.S. dollar liquidity as per a joint statement from various central banks.
Despite the banking system being under immense pressure, the Fed increased interest rates by another 25 basis points on March 22.
If the current market volatility has given you sleepless nights, now is an excellent time to consider your risk profile and long-term financial plan.
Stick to the personal finance basics and beef up your emergency fund. Although the current unemployment rate, as per the U.S. Bureau Of Labor Statistics, is below 5%, job losses accelerate when the economy heads into a recession.
From an investing standpoint, it is hard to time the market. It is essential to stay committed to your long-term strategic asset allocation and invest at regular intervals. Even if the markets are turbulent or we experience a recession down the line, sticking with your strategy will help you meet your financial goals.
This post was produced by Financial Freedom Countdown and syndicated by Wealth of Geeks.
For more local and national news, visit Fox Sports Texarkana’s website.