In this special report on the banking crisis following SVB's collapse, we reveal how often and how much bank customers have lost in failing banks.

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Simone Del Rosario Business Correspondent

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

Mar 28, 2023

Simone Del Rosario Business Correspondent

By Simone Del Rosario (Business Correspondent), Brent Jabbour (Producer), Emma Stoltzfus (Editor), Heath Cary (Motion Graphics Designer)

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.

Tags: Banking, Bill Isaac, Deposit Insurance Fund, Elizabeth Warren, Eric Foster, Federal Deposit Insurance Corporation, Federal Reserve, First Citizens Bank, Hal Lambert, Interest rates, Jerome Powell, National Bureau of Economic Research, Rate hikes, Signature Bank, Silicon Valley Bank, Woop Insurance

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ERIC FOSTER: If I thought that was a risk, I would have immediately mitigated the risk. That was not even a smidge of a thought in my head.

SIMONE DEL ROSARIO: SILICON VALLEY BANK MAY HAVE BEEN IN THE WEST.

BUT IT’S NOT THE WILD WEST – WHERE BANK BANDITS COULD MAKE OFF WITH YOUR HARD-EARNED CASH.

I’D ARGUE NOW, WHEN PEOPLE DEPOSIT MONEY IN THE BANK, IT’S BECAUSE THEY BELIEVE THAT’S THE SAFEST PLACE IT COULD BE.

IT’S NOT IN AN INVESTMENT THAT COULD LOSE VALUE. IT’S NOT IN YOUR WALLET WHERE IT COULD GET STOLEN.

IT’S IN THE MODERN BANKING SYSTEM, THE BACKBONE OF OUR ECONOMY.

BUT BANKS DO FAIL AND PEOPLE DO LOSE MONEY.

GIVEN THE MEDIA STORM AROUND THE FAILURES OF SILICON VALLEY AND SIGNATURE BANKS, IT’D BE FAIR TO THINK, WOW THIS MUST NOT HAPPEN VERY OFTEN.

BUT IT HAPPENS NEARLY EVERY YEAR.

MORE THAN 500 BANKS HAVE FAILED SINCE THE YEAR 2000.

AND WHILE NOT A PENNY OF INSURED FUNDS HAS BEEN LOST IN THE HISTORY OF THE FDIC – DEPOSITORS DON’T ALWAYS GET *ALL* THEIR MONEY BACK.

WE ASKED THE FDIC FOR A LIST OF FAILED BANKS WHERE UNINSURED DEPOSITORS LOST MONEY. AND GOT A LIST OF 76 INSTITUTIONS DATING BACK TO 1993.

SOME OF THOSE LOSSES ARE RELATIVELY SMALL. OF THE MORE THAN 30 MILLION IN DEPOSITS AT FAILED ENLOE STATE BANK, ABOUT 461-THOUSAND DOLLARS OF CUSTOMER MONEY WAS UNINSURED. AND 61% OF THAT WAS LOST FOR GOOD.

BUT WHEN, FOR INSTANCE, THE COLUMBIAN BANK AND TRUST COMPANY WENT UNDER, SO DID 95% OF UNINSURED DEPOSITS TOTALING MORE THAN 25 MILLION.

SO WHY – IF BANK FAILURES HAPPEN NEARLY EVERY YEAR, ARE SVB AND SIGNATURE DEMANDING SO MUCH ATTENTION AND CONTAGION?

IT’S PARTLY BECAUSE OF THE SHEER SIZE OF THE BANKS.

THE TOTAL ASSETS OF THESE TWO FAILED BANKS NEARLY MATCH THE ASSETS OF ALL FAILED BANKS IN 2008.

BUT UNLIKE SOME BEFORE THEM, NO ONE LOST A DIME.

ERIC FOSTER IS THE CEO OF WOOP INSURANCE, A VENTURE-CAPITAL-BACKED STARTUP THAT BANKED WITH SILICON VALLEY BANK.

ERIC FOSTER: It became evidently clear that by Thursday night, there was a run on it. So then we were like, Alright, let’s see if we can get the money out because there is a run on and we don’t know what’s going to happen from that. But at that point, it was too late.

SIMONE DEL ROSARIO: WITH MILLIONS IN UNINSURED FUNDS LOCKED AWAY AND ABOUT 25 FULL TIME EMPLOYEES AWAITING PAYROLL – FOSTER WENT INTO FIX-IT MODE. BUT WITHIN DAYS THE FEDERAL GOVERNMENT ANNOUNCED CUSTOMERS WOULD GET FULL ACCESS TO THEIR FUNDS. AND WOOP INSURANCE DECIDED TO STICK WITH THE FEDERALLY-CONTROLLED SVB.

ERIC FOSTER: I still feel safe, if anything, I more so trust the American government for stepping in as they did, and the reality was like, did I have a few really crappy days? What is the downside outside of the 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 the time spent? I think there should have been more tighter regulation on how those assets are managed. Like not to go into details. But why are you investing in a 10 year T note when you know, the average cycle span for a VC is 18 to 24 months when someone gets in their money to when they need to need a new flood of cash that is just flat out illogical to me.

SIMONE DEL ROSARIO: THE FDIC’S DEPOSIT INSURANCE FUND IS TAKING A $20 BILLION DOLLAR HIT OVER SVB’S FAILURE.

AND NOW, SVB HAS A NEW NAME. REGIONAL NORTH CAROLINA-BASED FIRST CITIZENS IS TAKING OVER – GETTING $56.5 BILLION IN SVB’S DEPOSITS AND $72 BILLION IN LOANS AT A $16.5 BILLION DOLLAR DISCOUNT.

ACCORDING TO A SPOKESPERSON, FIRST CITIZENS IS NOT NEW TO THIS. THEY’VE ACQUIRED MORE THAN 20 FDIC-INSURED BANKS SINCE 2009. AND ITS LATEST SNAG MOVES IT INTO ONE OF THE TOP 15 U-S BANKS, ACCORDING TO BLOOMBERG INTELLIGENCE.

BUT WILL IT BE ABLE TO MEET THE NEEDS OF TECH STARTUPS LIKE WOOP INSURANCE THAT BANKED WITH SVB? COMPANY CO-FOUNDER ERIC FOSTER TOLD US ABOUT TROUBLES WITH REGIONAL EAST COAST BANKS THAT DROVE HIM TO S-V-B IN THE FIRST PLACE.

ERIC FOSTER: Every time I had to wire something it came up as fraudulent. Because we had huge sums of money come in, come into us with basically no real reason for it outside of yes, we are venture capital backed that is what the industry is, and then huge sums of money outflow in a really short period of time. My literal line before, is 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 to get physically had to be the CEO of the company. So the reason why I went there is because, hey, we knew we had the money, there was a, there is a reputation of being easy. And frankly, when I got there, I was like, wow, this is a lot easier than everyone else.

SIMONE DEL ROSARIO: AND NOW BILLIONS ARE AT STAKE IN HOW FIRST CITIZENS ADAPTS TO ITS NEW, HUGE TECH BASE. FOR NOW, FOSTER TELLS US – HE’S STICKING WITH THEM.

FRANK HOLDING JR.: Silicon Valley Bank brings to us, overlaps our strengths in private banking, wealth management, and small business banking. 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.

SIMONE DEL ROSARIO: AS FIRST CITIZENS GOBBLES UP ITS LATEST BANK – A NEW STUDY RELEASED THIS MONTH SHOWS 186 BANKS ARE VULNERABLE TO THE SAME RISK THAT TOOK DOWN SVB.

RESEARCHERS FROM THE NATIONAL BUREAU OF ECONOMIC RESEARCH SAY IN A WORKING PAPER THAT EVEN IF *HALF OF UNINSURED DEPOSITORS AT BANKS TOOK THEIR MONEY AND RAN, 186 WOULD HAVE TROUBLE STAYING AFLOAT FOR EVEN THEIR INSURED DEPOSITORS.

HAL LAMBERT: You’ve got to figure with that number. You’re going to have one or two at least more banks that are going to have similar problems to Silicon Valley. And then what’s the, what’s the Fed going to do? Are they going to let depositors at those banks lose their money and start picking winners and losers at the regional bank level.

SIMONE DEL ROSARIO: IF A WIDESPREAD BANK RUN HAPPENED AND THE FDIC SHUT DOWN THESE BANKS, THE PAPER SUGGESTS THERE’D BE NO INSURANCE FUNDS LEFT OVER FOR REMAINING UNINSURED DEPOSITORS, MEANING THE DECISION TO RUN WOULD HAVE BEEN A RATIONAL ONE.

AND WHY THE GOVERNMENT IS KEEN ON EARLY INTERVENTION.

JEROME POWELL: The banking system is sound and it’s resilient. It’s got strong capital and liquidity. We took powerful actions with Treasury in the FDIC, which demonstrate that all depositors savings are safe into the banking system is safe. Deposit flows in the banking system have stabilized over the last week. And the last thing I’ll say is that we’ve undertaken, we’re undertaking a thorough internal review that will identify where we can strengthen supervision and regulation.

SIMONE DEL ROSARIO: BUT IS IT TIME FOR THE GOVERNMENT TO RECONSIDER HOW MUCH OF YOUR BANK DEPOSITS ARE INSURED? RIGHT NOW IT’S $250-K. BUT LET’S GO BACK TO WHAT I SAID AT THE BEGINNING OF THIS REPORT. PEOPLE OFTEN ASSUME THEIR MONEY, ALL OF THEIR MONEY, IS SAFE IN THE BANK.

ERIC FOSTER: 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.

SIMONE DEL ROSARIO: SOME ARE CALLING FOR THE FDIC CAP TO BE RAISED. IT WENT FROM 100K TO 250 DURING THE 2008 FINANCIAL CRISIS.

SEN. ELIZABETH WARREN: I think that lifting the FDIC insurance cap is a good move. 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.

SIMONE DEL ROSARIO: FORMER FDIC CHAIR BILL ISAAC TELLS ME – HE’S NOT A FAN.

WILLIAM ISAAC: I think that would be a horrible idea and would destroy the free enterprise system that we have developed and the banking system that supports it.

SIMONE DEL ROSARIO: HERE’S HIS COUNTER PROPOSAL.

WILLIAM ISAAC: What we wanted to do was to put full insurance, full 100% deposit insurance on all business checking accounts that did not pay interest. 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 or nation and the small business sector of the nation in particular, if we would protect non-interest bearing business checking account.

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

SIMONE DEL ROSARIO: LET’S GET THE CONVERSATION GOING IN THE COMMENTS…WHAT SURPRISED YOU IN THIS REPORT? AND STICK WITH STRAIGHT ARROW NEWS FOR MORE BANKING CRISIS COVERAGE. I’M SIMONE DEL ROSARIO, IN NEW YORK, IT’S JUST BUSINESS.