As the dust starts to settle following the collapse of Silicon Valley Bank and Signature Bank in March, economists are warning of cracks in the system that started spreading even before the failures. Under conditions of banking turmoil, some are worried credit tightening will become a credit crunch.

A credit crunch is a decline in lending activity driven by a shortage of funds. Or, as Moody’s Analytics Chief Economist Mark Zandi puts it, “the inability of households and businesses to get the credit that they need.” It’s a phenomenon that can have a big impact on the economy and its growth.

“I’m getting really nervous now that an economy that I thought was going to dodge recession is now at much greater risk of falling into one and it could be quite severe because bank credit is the lifeblood for small businesses,” Pantheon Macroeconomics Chief Economist Ian Shepherdson said during a CNBC interview.

Following March’s Federal Open Markets Committee meeting, Federal Reserve Chair Jerome Powell said the second and third largest bank failures in U.S. history “are likely to result in tighter credit conditions for households and businesses, which would in turn affect economic outcomes.”

But the train was already on those tracks before the banks’ closures. Loan activity has been trending down due to the central bank’s aggressive actions to tame inflation. Over the last 12 months, the Fed raised its benchmark interest rate from near 0% to nearly 5%.

The latest Fed survey found roughly 44% of banks reported tightening standards for business loans in the first quarter of 2023. With the exception of the COVID-19 pandemic, it’s the highest share to say that since 2009 in the wake of the Great Recession.

“The possibility of the restriction of credit to be so significant that under almost any terms you can’t get a loan, that’s certainly a risk of something that may happen,” Zandi told Reuters.

The most recent example of a credit crunch was after the 2008 financial crash. Financial institutions had trillions of dollars in subprime mortgages that were essentially worthless. Banks that were able to weather the storm didn’t have the resources or risk appetite to lend at their previous pace. Even highly-qualified individuals and businesses struggled to get approved.

Access to capital fuels growth in the U.S. economy and that credit crunch significantly slowed expansion in the years that followed.

“The ‘08, ‘09 financial crisis is in a league of its own,” Zandi said. “What we’re experiencing now, it doesn’t feel very good, it’s very uncomfortable, but it’s nothing compared to what we suffered back in that crisis.”

The Federal Reserve is monitoring how commercial banks tightening credit will affect its policies moving forward.

“The key is we have to have policies to bring inflation down to 2% over time,” Powell said in March. “It doesn’t all have to come from rate hikes. It can come from tighter credit conditions.”

Reaching the Fed’s 2% inflation target without entering a recession, known as a soft landing, was already a challenge with the central bank’s limited, blunt toolset. But at least the Fed has control over those tools. A credit crunch could bring in a whole new set of unknowns.

“I’m much less confident in my optimism about avoiding recession than I was two weeks ago because of the banking crisis,” Zandi said. “There’s a lot of uncertainty here. How significant is this credit crunch going to be? How big an impact is that going to have?”

Reuters contributed to this report.

RELATED REPORTS

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• SVB CEO sold millions in stock before collapse. Politicians want to claw it back.
• Bankruptcy filings surpassed pandemic peak even before bank crisis took hold
• Small business could struggle to get credit as banks face record withdrawals
• Banking crisis ‘hiding in plain sight,’ Chase CEO Jamie Dimon says

Mere hours before the federal government seized it, Silicon Valley Bank paid out employee bonuses. In response, a bipartisan group of lawmakers have introduced legislation to recoup funds from bank executives in the event of future failures.

While the timing appeared suspicious, the SVB bonuses were a part of employees’ annual payout and planned in advance of the bank’s collapse. But paired with CEO Greg Becker cashing out $3.6 million in shares of SVB less than two weeks prior to the failure, these actions caught the attention of Washington politicians.

“It’s outrageous that these people took bonuses and sold stock in the days leading up to the bank’s failure,” Sen. Kyrsten Sinema, I-Ariz., said during a banking committee hearing featuring regulators on March 28. “We should hold these executives accountable for the fullest extent of the law and claw back those bonuses and stock sales.”

Federal regulators immediately terminated bank leadership in the wake of the collapse, but they had a cushion to fall back on. Executives and directors at SVB cashed $84 million worth of SVB stock over the past two years as the bank’s profits soared, according to Smart Insider. That’s in addition to the millions paid in executive salaries each year.

“When banks fail because of mismanagement and excessive risk taking, it should be easier for regulators to claw back compensation from executives, to impose civil penalties, and to ban executives from working in the banking industry again,” the White House said in a statement a week after SVB failed.

In various forms, Congress has answered the call. A bipartisan group of senators headlined by Sen. Elizabeth Warren, D-Mass., introduced “The Failed Bank Executives Clawback Act of 2023” on March 29. The bill would “claw back from bank executives all or part of the compensation they received over the five-year period preceding a bank’s insolvency or FDIC-resolution.” Republican Sens. Josh Hawley, R-Mo., and Mike Braun, R-Ind., are also co-sponsors.

Warren said the legislation would incentivize executives to act more cautiously.

“If you load this bank up on risk and the bank explodes, you’re going to lose that fancy bonus, you’re going to lose that big salary, you’re going to lose those stock options,” Warren said in an interview with CNBC on Friday, March 31.

Michael Barr, vice chair of supervision at the Federal Reserve, told senators during the week of March 26 that regulators already have some authority to hold executives accountable. He said the consequences could include a prohibition from banking, civil penalties or payment as part of restitution.

Saving depositors from SVB’s failure cost the Federal Deposit Insurance Corporation’s deposit insurance fund $20 billion. The fund will eventually be replenished through a special fee on banks. FDIC Chair Martin Gruenberg told the Senate Banking Committee that giving the FDIC explicit clawback authority “probably would have some value.”

Separate but similar legislation has been introduced in the House of Representatives as well. Despite the bipartisanship in introducing these types of bills, Congress has struggled to cross this finish line in the past.

Following the 2008 financial crisis, the House passed a bill by the wide margin of 328 to 93 that would have imposed a heavy tax on bonuses of high-earning employees at companies that were bailed out by the federal government. The legislation later stalled in the Senate.

RELATED REPORTS

• The banking crisis is ‘not over’ — and another crisis is already looming
• What’s a credit crunch? The feared bank phrase that may lead to a recession
• Small business could struggle to get credit as banks face record withdrawals
• Banking crisis ‘hiding in plain sight,’ Chase CEO Jamie Dimon says
• Bankruptcy filings surpassed pandemic peak even before bank crisis took hold

The national park business is booming back to pre-pandemic levels. According to the National Park Service, 312 million people visited one of 63 congressionally designated national parks across the U.S in 2022. That’s 15 million more than in 2021. But with more visitors comes more accidents and fatalities. 

“Anybody can get hurt if they’re in the mountains, no matter whether they’re an expert or beginner. The mountains are always moving, rocks fall, snow slides, people trip, people make mistakes. All these things are possible,” Jason Martin, executive director of the American Alpine Institute, said. 

Martin has been climbing mountains for 31 years. 

“I think that there are more mountain climbers coming to the national parks, that’s for sure. But most of the visitors that go to national parks are day tourists in the national parks. There’s a set percentage that does more adventuring further away from the road. And then of that percentage, there’s a smaller percentage that will do some type of climbing type thing,” Martin said.

According to PSBR Law, a firm that analyzed data it received via a Freedom of Information Act request from the park service, there were a total of 2,727 deaths at U.S. national park sites between 2007 and 2018. That’s 8 deaths per 10 million visits. 81% of those deaths were male. The No. 1 cause of death was drowning, followed by motor vehicle crashes. Falls and slips were fourth.

“These types of things happen in the mountains, regardless of who you are. It doesn’t matter how strong you are, how fit you are, how good you think you are with your backpack, with your climbing gear, or how strong of a climber you are. Anybody can make a mistake. And anybody can get hurt or worse,” Martin said.

In part two of this series, Straight Arrow News will visit the park with the highest death rate in the U.S to investigate why it has a mortality rate three times higher than the second highest site. The park isn’t Yosemite or the Grand Canyon, it’s actually the North Cascades National Park in Washington. 

While many Major League Baseball fans celebrated opening day and the return of “America’s Pastime” on March 30, the Colorado Rockies are dealing with controversy before their upcoming first pitch at home. As part of preparations for the Rockies opener on April 6, the city of Denver initiated the removal of homeless encampments near Coors Field in a move that has been met with criticism from local advocacy groups.

“It’s disgraceful, and they’re not trying to solve the problem,” Grant Francis said. Francis is with the homeless advocacy group Mutual Aid Monday, which provides meals every Monday night to those experiencing homelessness. “They’re just trying to provide some optics that make it look like they’re trying to do something.”

This is not the first time that Denver has drawn criticism for conducting sweeps of homeless camps ahead of major sporting events. According to The Denver Post, in 2021 the city cleared out more encampments over six months than it did through all of 2020, with this uptick in homeless sweeps coming as Denver was preparing to host that season’s MLB All-Star Game.

“It doesn’t surprise me that Coors Field is one of the targets,” Francis said. “It’s anywhere where there’s an event that generates any kind of income for the city.”

The city completed 51 sweeps of homeless camps during the lead-up to these All-Star festivities, compared to 49 during the year prior. As the game approached, Denver picked up its pace to 10 sweeps per month in April, May and June, just before the Midsummer Classic came to town in July. This practice brought protests from local homeless advocates at the time, and now the city is facing renewed complaints from the public over this latest round of sweeps.

“Our city policy never changes,” Matthew Wilmes, encampment program response executive with the Denver city government, said. “Of the 10 large encumbrance removals that we’ve done in the last month, two of them were in the ballpark area. And the reason for that is they were some of the largest that we were dealing with.”

A 2021 study by the Common Sense Institute in collaboration with researchers at the University of Colorado Denver estimated the city spent more than $100,000 per homeless person per year. However, activists are calling on lawmakers to ensure that money goes towards more housing opportunities and stop the removal of homeless people from their camps.

“We all know sweeps don’t work, moving a tent across a border, pretending we solved someone’s problem, it doesn’t work,” Denver mayoral candidate Kelly Brough said. “We need to house and shelter people.”

Meanwhile, within the Rockies organization — attempts are being made to combat local homelessness. Relief pitcher Daniel Bard has been involved with Amp the Cause, an organization raising funds for Colorado nonprofits, and the team has partnered with the Denver Rescue Mission to hold food drives that aim to address food insecurity within the city.

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.

No. 1: Bank failures happen a lot more often than you think — and people can and do lose money.

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. Read more here.

No. 2: SVB has a new owner — and they’re not new to this game

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. And they got it at a pretty hefty discount. Read more here.

No. 3: The U.S. has almost 200 banks at risk of SVB-like failure

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. Read more here.

No. 4: Lawmakers are talking about hiking the FDIC cap to the millions of dollars

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? Read more here.

It’s been less than six months since Elon Musk closed on Twitter for $44 billion after backing out and facing litigation over the matter. There’s still a question as to whether it’s better or worse under the world’s second wealthiest person’s leadership. But, it’s certainly different. Here are the ways he’s changed the platform in this week’s Five For Friday.

#5: Twitter Blue

Before Musk, Twitter’s verified check signified an elite group of users. Just ask anyone with a legacy verified account, and they’ll tell you how important the checks are. But Twitter Blue made it so anyone willing to pay $8 on the web could procure the highly coveted check mark. It’s $11 if you sign up from an iOS or Android device so the company can make up the respective app store fees of 30%. Twitter Blue subscribers can edit tweets, get early access to new features and eventually see fewer ads. Musk said the platform will start taking away the old guard’s checks in April. Full disclosure: At the time of writing, Simone Del Rosario has a legacy verified account, although it provides the caveat that she “may or may not be notable.”

#4: Verified ‘For You’

It seems the idea of verified accounts is important to the Twitter ecosystem. Musk announced this week that only verified accounts will show up in the platform’s ‘For You’ section, which uses its algorithm to recommend content from people you don’t follow. He claims it’s the only way to combat bots taking over the platform, something he was concerned about amid negotiations to buy the company. Users will also need a blue check to take part in Twitter polls too, a feature Musk himself has used quite a bit since taking over.

#3: Account reinstatement

Over the years, Twitter has banned a whole host of controversial figures including Alex Jones, Tila Tequila and ‘Pharma Bro’ Martin Shkreli. When Musk took over, he wanted a fresh start and reinstated folks like kickboxer Andrew Tate, who apparently has a massive following for being a misogynist. He was later roasted by climate activist Greta Thunberg before being arrested in Romania on sex trafficking charges. Former President Donald Trump was also reinstated after being banned following the events of Jan. 6, 2021. But he never returned, opting to stick to his own platform Truth Social. Ye, the rapper formerly known as Kanye West, also made a brief return before getting banned again. Jones, Tequila, and Shkreli have yet to get a Twitter reprieve.

#2: No more Trust and Safety

Shortly after taking over, Musk disbanded the platform’s Trust and Safety Council. It was a group of 100 independent advisors created in 2016 to address hate speech, child exploitation and self-harm, among other issues on Twitter. Prior to doing away with the council, studies showed hate speech had already spiked on the platform since Musk’s takeover. But for his part, Musk claims he defeated the hate bots. Independent analyses say otherwise.

#1: Twitter Files

Musk’s Twitter, or Twitter 2.0, has been more transparent than previous leadership. He tapped independent journalists like Matt Taibbi and Bari Weiss to report on the Twitter Files, a series of select internal documents from the company. The Twitter Files have covered issues like the platform’s moderation of the Hunter Biden laptop story from the New York Post, Jan. 6, COVID-19 and Twitter’s dealings with the U.S. government, just to name a few. He also said he will make Twitter’s recommendation algorithm open source as of March 31. Parts of Twitter’s source code have apparently already been leaked, according to court filings.

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.
Click here to go straight to this video.

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
Click here to go straight to this video.

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
Click here to go straight to this video.

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?
Click here to go straight to this video.

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.

Banks in the U.S. fail nearly every year and depositors aren’t always made whole, like the federal government did at Silicon Valley Bank and Signature Bank in March. Since 1993, customers of 76 different institutions have lost money in a bank, from hundreds to millions, according to the Federal Deposit Insurance Corporation.

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?

LEARN MORE: Is your money safe in the bank after Silicon Valley Bank failure?

“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 Eric Foster, CEO and co-founder of startup Woop Insurance, 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.”

LEARN MORE: 186 banks are at risk of Silicon Valley Bank-like failure: Study

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.

RELATED REPORTS

• Why are banks collapsing and is your money safe in the bank?
• How Silicon Valley Bank collapsed in less than 48 hours
• Will federal regulators secure deposits at all failing banks like they did at SVB?

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.

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.

RELATED REPORTS

• Why are banks collapsing and is your money safe in the bank?
• First Citizens Bank scoops SVB, FDIC to take $20B hit on failure
• Congress wants to know who’s to blame for Silicon Valley Bank collapse
• 186 banks are at risk of Silicon Valley Bank-like failure: Study

In the wake of a bank run on Silicon Valley Bank that contributed to its collapse earlier this month, 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.

Interest-rate risks

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.

Rescuing uninsured depositors

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.

Banks under federal review

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?”