Banks are seen as safe but uninsured customers have been burned before

When Silicon Valley Bank and Signature Bank collapsed in a matter of days, it was a stark reminder to the American people that U.S. banks do fail. More than that, while all uninsured depositors were spared in these two bank failures, that’s not always the case.

Given the media storm around this month’s bank failures, it would be fair to think that it must not happen very often. But bank failures happen nearly every year.

In this special report on the banking crisis, Straight Arrow News reveals how often and how much bank customers have lost in failing banks. We also speak to a Silicon Valley Bank customer whose startup funds were stuck in the bank for days and highlight a report on U.S. banks that are vulnerable to collapse.

Bank failures happen more often than you think, and people do lose money.
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More than 500 banks have failed in the U.S. since the year 2000. And while not a penny of insured funds has been lost in the history of the Federal Deposit Insurance Corporation, depositors don’t always get all of their money back.

The FDIC provided Straight Arrow News with a list of 76 institutions dating back to 1993 where uninsured depositors lost money in a bank failure. Some of the total overall loses are relatively small, but some number in the millions.

• When Texas-based Enloe State Bank failed on May 31, 2019, less than half a million of the more than $30 million in deposits were uninsured. The government failed to secure 61% of the uninsured deposits, totaling a customer loss of $279,560.
• But when The Columbian Bank & Trust Co. failed on Aug. 22, 2008, uninsured deposits totaled more than $26 million, and 95% of uninsured deposits were lost, totaling $25,252,158 in customer funds.

So why, if banks fail nearly every year, are Silicon Valley Bank and Signature Bank’s failures garnering so much media attention and contagion risk? It’s partly because of the sheer size of the banks.

The total assets of the two failed banks nearly match the assets of all failed banks in 2008. But unlike many before them, no one lost a dime.

When Woop Insurance co-founder and SVB customer Eric Foster learned of the bank run on March 9, he said his company attempted to withdraw its funds, but at that point the bank couldn’t honor it.

With millions in uninsured funds locked away and about 25 full-time employees awaiting payroll, Foster went into fix-it mode to make sure the business stayed afloat. Armed with an emergency plan, within days it was clear they wouldn’t need to continue carrying it out. The federal government announced customers would get full access to their funds and Woop Insurance decided to stick with the then-federally controlled bank.

“I still feel safe, if anything, I more so trust the American government for stepping in as they did,” Foster said. “The reality was like, ‘Did I have a few really crappy days? What is the downside outside of a handful of days and additional work for me?’ I did not lose a single dollar nor did my business lose a single dollar outside of time spent.”

That said, Foster added that he believes there should have been tighter regulations on how SVB managed its assets, calling its decision to heavily invest in long-term bonds “flat-out illogical.”

Federal regulators are investigating the collapse of SVB and will publicly release findings on May 1, including any missteps made by regulators who identified serious risk concerns at SVB back in 2021.

Silicon Valley Bank gets a new owner
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Silicon Valley Bank deposits are no longer under federal control. On Sunday, March 26, the Federal Deposit Insurance Corporation announced that North Carolina-based First Citizens BancShares acquired $56.5 billion in deposits and $72 billion in loans from Silicon Valley Bank.

The regulatory agency estimates the collapse will cost its deposit insurance fund roughly $20 billion. The fund relies on fees from member banks and does not use U.S. taxpayer dollars.

First Citizens purchased the failed bank at a $16.5 billion discount and is hoping to leverage Silicon Valley Bank’s specialty in technology companies.

“Silicon Valley Bank overlaps our strengths in private banking, wealth management and small business banking,” First Citizens Chairman and CEO Frank Holding Jr. said in an interview with CNBC Monday morning. “What we look forward to learning and listening to is their market expertise in serving the tech and venture market and we’ll be adding a lot of associates with that capability.”

First Citizens has acquired more than 20 FDIC insured institutions since 2009, the bank said in a statement Monday, March 27. And the latest deal moves it into the top 15 banks in the nation, according to Bloomberg Intelligence. Silicon Valley Bank’s 17 locations in California and Massachusetts opened under its new parent company Monday morning.

The new bank will have to meet the expectations of a niche clientele that went to Silicon Valley Bank for very specific reasons, like Foster, whose company turned to SVB after facing issues with East Coast regional banks.

“Every time I had to wire something it came up as fraudulent,” Foster told Straight Arrow News. “Because we had huge sums of money come in with basically no real reason for it outside of, yes, we are venture-capital backed and that is what the industry is, and then huge sums of money outflow in a really short period of time.”

“Commercial banking was the bane of my existence, because I would spend days just doing normal business transactions, and it had to actually be me, physically had to be the CEO of the company,” he explained.

Foster said Silicon Valley Bank’s reputation and ease of doing business there convinced him to make the switch. In the wake of First Citizens’ acquisition, Foster said it’s, “business as usual at this point.”

There are 186 banks at risk of SVB-like failure, according to this study
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A new study from researchers at the National Bureau of Economic Research found nearly 200 banks would be vulnerable to the same risk if met with a similar event.

The researchers said in a working paper that if half of uninsured depositors at banks withdrew their funds, 186 banks would risk failure and could not support even their insured depositors.

The Federal Reserve’s aggressive rate-hike campaign, which has raised interest rates from near zero in early 2022 to 5% in March 2023, has decreased the value of existing bank assets like government bonds and mortgage-backed securities.

“The recent declines in bank asset values very significantly increased the fragility of the U.S. banking system to uninsured depositor runs,” the researchers wrote in the paper.

The paper adds that these banks would only be vulnerable if the government takes no action.

“So, our calculations suggest these banks are certainly at a potential risk of a run, absent other government intervention or recapitalization,” the paper reads.

Silicon Valley Bank had billions of dollars tied up in long-term Treasury bonds, which lost value due to rising rates. When depositors pulled their funds from the institution, it didn’t have the cash on hand to meet the requests.

The Federal Deposit Insurance Corporation took control of the failed bank and eventually made deposits available to all customers, even those with more than the FDIC-insured limit of $250,000. The working paper published in the Social Science Research Network noted that SVB had a “disproportional share of uninsured funding: only 1% of banks had higher uninsured leverage.”

That said, researchers noted that when it comes to the interest-rate risks SVB faced, 10% of banks have larger unrecognized losses and 10% of banks have lower capitalization than SVB.

North Carolina-based First Citizens Bank stepped in and acquired $56.5 billion in deposits and $72 billion in loans from Silicon Valley Bank at a $16.5 billion discount. The FDIC expects the bank’s failure will cost the federal deposit insurance fund around $20 billion.

Federal Reserve Chair Jerome Powell attempted to assuage the fears over broader problems in the nation’s financial system.

“The banking system is sound and it’s resilient,” Powell said last week following its latest rate hike. “It’s got strong capital and liquidity. We took powerful actions with the Treasury and the FDIC, which demonstrate that all depositors’ savings are safe.”

“We’re undertaking a thorough internal review that will identify where we can strengthen supervision and regulation,” Powell continued.

That review will be publicized on May 1, according to regulators who testified in front of the Senate banking committee Tuesday, March 28. But some analysts worry that if the broader contagion is felt in the border banking system, the government will be forced to decide which banks to save.

“What’s the Fed going to do?” Hal Lambert, founder of Point Bridge Capital asked during an interview with Straight Arrow News. “Are they going to let depositors at those banks lose their money and start picking winners and losers at the regional bank level?”

Is it time to increase the FDIC insurance cap of $250,000?
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Before the 2008 financial crisis, only $100,000 in deposits were FDIC-insured. That was raised to $250,000 in 2008, but is it time to raise the cap again?

“If you really only believe that you have $250,000 that’s going to be safe in there, not only will you not deposit it, people are not going to spend money nearly as much. That money will not be reinvested in the economy because banks can’t loan it out to other businesses or other people,” said Foster, a former Silicon Valley Bank customer.

Sen. Elizabeth Warren, D-Mass., is among those calling for a raise in the FDIC cap following the most recent bank failures.

“I think that lifting the FDIC insurance cap is a good move,” she said. “Now the question is, where’s the right number? Is it $2 million? Is it $5 million? Is it $10 million? Small businesses need to be able to count on getting their money to make payroll.”

Former FDIC Chair Bill Isaac told Straight Arrow News he thought Warren’s idea was “horrible.” Isaac served as chair in the early ’80s, navigating a tumultuous time for banks. He brought up a proposal he had back when he was chair that he said would still work today.

“What we wanted to do was to put full insurance, full 100% deposit insurance, on all business checking accounts that did not pay interest,” Isaac said. “The notion that small businesses need their checking account money available to them at all times, under almost all circumstances, is absolutely correct. And it would be a huge benefit to our country and the small business sector of the nation in particular if we would protect non-interest bearing business checking accounts.”

“Clearly I’m biased that I’m going to like that proposal, particularly given the current environment,” Foster said. “I would say, I don’t think there is, to my knowledge, a downside in doing that.”

Foster told Straight Arrow News that when SVB would not allow them to withdraw their business funds, he scrambled to figure out how to pay his 25 full-time employees in the meantime before the government announced that depositors would be backstopped and have access to their funds within days.