The what, why and how of the banking news — and is your money still safe?
The past month has been tumultuous for the banking industry. Silicon Valley Bank and Signature Bank both experienced a bank run (when a large number of customers try to take out their money in a short time) resulting in a collapse. Additionally, Credit Suisse and First Republic Bank required large lines of credit to stay afloat — and Credit Suisse was ultimately bought by rival bank UBS.
The news headlines are bound to spark fears, especially when it comes to personal finances.
So, let’s break it down. What exactly is happening to the banks— and is your money safe?
What happened?
Silicon Valley Bank (SVB) had a client base made up primarily of tech companies, start-ups and venture capitalists. When a bank is insured by the Federal Deposit Insurance Corporation (FDIC), customer funds are covered up to $250,000 per depositor, and with SVB, more than 90 percent of their client base had funds that exceeded the insured amount.
Customers started to become concerned with SVB’s bond portfolio, which had recently lost value (more on that below). With confidence in the bank at a low, some customers started to withdraw their funds. Word started to spread, and more and more customers started to withdraw their money. Because banks are only required to have 10 percent of their reserves on hand, SVB was unable to meet their obligations and couldn’t give customers their money. They were forced to close.
While SVB was experiencing their bank run, New York-based Signature Bank’s customers started to experience similar volatility. Their client base included people in cryptocurrency, real estate, investing and other industries, and like SVB, its base had a high percentage of customers exceeding the $250,000 FDIC insurance guarantee. Signature Bank’s clients became scared by the SVB closure, there was a similar bank run, and the bank closed.
As a result, global authorities are starting to look at other banks closely — especially those that have lost stock value, are experiencing large amounts of customer withdrawals, or are exhibiting other signs of distress. Switzerland bailed out Credit Suisse, which was eventually bought by rival bank USB, while in the United States, the US Treasury organized private sector investors to deposit billions of dollars into the bank to stop the downfall of First Republic Bank. The US government also pledged to guarantee all deposits at both SVB and Signature Bank beyond the $250,000 limit.
Why did it happen?
A few factors led to this moment. First, is that while the labor market is strong, several industries have been struggling, including the tech sector and the cryptocurrency world.
Second, in order to curb pandemic-related inflation, the U.S. Federal Reserve has been raising interest rates. In turn, high interest rates have depreciated the value of US treasury bonds, which are traditionally a safe investment bet. As the tech sector hit hard times, and customers withdrew funds, SVB was forced to sell the bonds at a huge loss, triggering the bank run.
Another factor is the partial rollback of the Dodd-Frank Act. After the 2008 recession, Congress passed the Dodd-Frank Act, which aimed to remedy some of the lending practices and anything-goes policies that led to the recession.
But in 2018, citing the impact on smaller, regional banks, Congress rolled back part of the Dodd-Frank Act, loosening regulations and oversight of the industry. Because of this, banks have been allowed to engage in riskier practices — including letting an extreme percentage of a bank’s client base exceed the $250,000 FDIC guarantee.
Is Your Money Safe?
Anyone with deposits less than $250,000 can breathe easy, as it’s insured by the FDIC. So even on the off chance your bank fails, you won’t lose any money.
However, as a result of this volatility, it could be harder to acquire a loan. Banks are likely going to examine lenders more closely for mortgages, small business loans, and other lending opportunities.
Additionally, the recent bank failures have increased worries about a looming recession. Experts say that before the bank failures, the U.S. had a 25 percent chance of hitting a recession, and that now, we’re looking at a 35 percent chance of recession in the next 12 months.
In the meantime, for the average consumer, there’s little to worry about. But keep recession prep in the back of your mind — just in case.
