After the collapse of two banks, people are asking, are banks safe or is my money safer under my mattress?
On Friday, March 10, federal banking regulators shut down Silicon Valley Bank, or SVB, making it the second largest bank failure in U.S. history.
Two days before bank regulators shut the bank down, SVB signaled that it was facing a cash crunch. In an effort to raise more capital, SVB tried selling shares and when that didn’t work, it tried to sell itself. This entire scenario spooked investors and ultimately led to the failure and closing of the bank.
By Sunday, March 12, the federal government, hoping to ease concerns and build consumer confidence, issued a statement ensuring all SVB’s depositors that they would have access to their funds by Monday morning, March 13.
In the wake of SVB’s failure along with the subsequent government closing of Signature Bank in New York, many individuals and businesses found themselves wondering what all this meant and should they go down to their local bank and immediately withdraw all of their money.
“Thanks to the quick action my administration has taken over the past few days, Americans can have confidence that the banking system is safe. Your deposits will be there when you need them,” President Joe Biden said on Monday.
Biden also emphasized that unlike the banking failure of 2008, taxpayers won’t wind up footing the bill for the government’s actions: “Instead, the money will come from the fees that banks pay into the [FDIC] deposit insurance fund.”
The failure of SVB did send shock waves through Silicon Valley, Silicon Beach and other parts of the tech world. What led to the banks demise was that many of the companies and individuals who had deposits with SVB quickly moved to pull their funds out of the bank earlier in the week — these actions, ironically, contributed to the bank’s demise.
Not everyone was able to get their cash out before the bank was closed, and the FDIC only insures deposits up to $250,000, so customers who had more than that in SVB have spent the last few days in a panic, though the government now says their money will be there for them.
Throughout Los Angeles County, the SVB failure has many people asking what does this mean for the entire banking system and just how worried should I be about my bank?
There is a strong argument made by some that it’s good for the economy when banks fail. It’s been reported that the longest stretch in American history for any bank not to fail was from 2004 to 2007, which is just prior to the full banking industry, home mortgage business and lending collapse of 2008.
The overall banking industry is perceived to be fine and SVB probably would have survived had not their attempts at selling stock and/or selling the bank went array and everyone had not starting pulling their funds out of the bank all at one time.
“There’s always a risk of contagion, because banking is fundamentally a game of trust and confidence,” said Aaron Klein, a senior economics fellow at the think tank Brookings Institution. “When they erode, the system becomes less stable.”
What consumers should remember is that you don’t need to start pulling your dollars out of your bank and hiding them under your mattress. Remember, up to $250,000 of bank deposits are insured by the federal government, so unless you’ve got more than that in there you will be fine.
In hopes of calming uneasy depositors and ensure the American public that the banking economy is stable, the National Bankers Association released the following statement on March 13.
“In light of recent industry events, the National Bankers Association wants to assure consumers that your money is safe with minority banks. Minority depository institutions are very different from both SVB and Signature Bank, which had high concentrations in crypto deposits and volatile venture capital.
“Minority banks are not exposed to riskier asset classes and have the capital and strong liquidity to best serve consumers and small businesses. If you’re looking for a place to bring your deposits and have greater impact, bring your deposits to minority banks,” said Nicole Elam, president and CEO of the National Bankers Association.
“The Biden-Harris Administration, FDIC, and Federal Reserve worked hard this weekend to make sure that these bank failures are the exception, not the rule, and that all Americans can continue to have confidence in our banking system,” said Robert James II, chairman of the National Bankers Association and president/CEO of the Carver Financial Corporation.
“I also applaud bipartisan leaders in Congress for keeping stakeholders informed about how hard-earned deposits are being kept safe.”
“The National Bankers Association is the nation’s leading trade association for the country’s minority depository institutions (MDIs). MDIs have always focused on safety and soundness as a part of our conservative, relationship-based business model. We continue to monitor SVB’s impact on large corporate deposit concentrations, fintech, tech companies, and larger financial institutions that have partnerships with MDIs or who have made investments in MDIs.
“MDIs are in the strongest position ever to support their customers and here’s why:
- Traditional Banking Model with Diverse & Secure Assets: MDIs are diversified in terms of their assets, predominately focused on well-collateralized loans, and are not exposed to riskier asset classes. Unlike both SVB and Signature Bank, MDIs have very limited exposure to the venture capital industry and crypto.
- Well-Capitalized and Strong Liquidity: MDIs are in the strongest position ever. The sector is exceptionally well capitalized, enjoys substantial liquidity overall, and has grown by 33% over the last three years in total assets. Nearly $4 billion in new, permanent capital has flowed to MDIs and currently, the median MDI common equity ratio is 16.4% versus 14.8% for non-MDIs.
“The FDIC was created following the Great Depression, when a lot of banks failed, and their customers lost all of their money. Today, America does provide some stability for the banking system by ensuring that if a member bank fails, deposits will be insured for up to $250,000. Anything above $250,000 however is not guaranteed.
However, a few days after SVB’s failure, the Federal Reserve Board, Department of the Treasury, and the FDIC announced that it would “make available additional funding to eligible depository institutions,” which would reimburse depositors in full.
Alexander Yokum an analyst from CFRA who covers banking said in an interview that he wouldn’t be surprised if a couple of other banks run into trouble, but likely not many — and not the big ones, such as JPMorgan, Wells Fargo, and Bank of America.
“It will likely stay concentrated to a few select banks,” he said. “They’re diversified, and they have a ton of deposits. So even if they lose some, they’re still okay. They’re not close to the line of having to sell securities. I really do think it’s banks that cater to high net worth individuals and specialized banks.”
