Why Do Banks Fail and What’s Next? 2023 Lessons and Predictions (2024)

Why Banks Fail

Banks can fail for many reasons, the majority of which fall into one of three broad categories:

  1. A run on deposits (leaving the bank without the cash to pay customer withdrawals).
  2. Too many bad loans/assets that fall sharply in value (eroding the bank’s capital reserves).
  3. A mismatch between what the bank can earn on its assets (primarily loans) and what it has to pay on its liabilities (primarily deposits).

Often bank failure is the result of more than one of these conditions occurring at the same time.

2023 Bank Failures

At Silicon Valley Bank (SVB) for example, its large holdings of government bonds lost value as the Federal Reserve rapidly hiked interest rates. The Fed raised the Effective Federal Funds Rate from 0.09% at the beginning of 2022 to 5.09% by mid-July 2023 and the value of those bonds plummeted. At the same time, as the tech industry slowed and funding for startups became less available, more SVB customers needed to withdraw their money.

The monoline nature of SVB’s business exacerbated the bank’s risk. Its tech-heavy customers were in highly correlated businesses focused on an inherently risky business sector. It is estimated that only about $5 billion of SVB’s $180 billion deposits were fully insured, an unusually low percentage, which revealed its unusually high dependence on corporate rather than retail deposits.

In the weeks before its collapse, SVB took extraordinary steps to shore up its balance sheet by selling its entire bond portfolio at a $1.8 billion loss and simultaneously announcing it would sell $2.25 billion worth of new shares. Anxious depositors took the cue and accelerated their withdrawals. On Thursday, March 9, depositors withdrew $42 billion from SVB. On March 10, SVB’s stock declined 60% and on Monday, March 13, 2023, SVB failed and the FDIC transferred all the deposits of Silicon Valley Bank to Silicon Valley Bridge Bank, N.A., a full-service bridge bank operated by the FDIC.

SVB’s collapse was only a few days after multiple other bank failures: the crypto bank Silvergate, the presaged failure of Signature Bank in New York, and the forced rescue of First Republic Bank on May 1 (in what used to be known as “a Jamie deal” in honor of J.P. Morgan Chase’s chairman and his sweetheart acquisition of Bear Stearns in 2008). Although FDIC insurance has been at $250,000 per depositor since 2020, corporate deposits were well above that, especially at SVB, causing depositors to flee.

Central Banking and the Diamond-Dybvig Model

Although central banking has been around since Sweden’s Riksbank opened in 1609, a thorough understanding of it was lacking until the latter nineteenth century. In 1873, Walter Bagehot, the British polymath, wrote clearly and extensively about the appropriate functions of a central bank, notably as a lender of last resort. His many dictums include “lending freely against good collateral at a very high rate,” maintenance of sufficient liquidity reserves and management that prioritizes a bank’s welfare before its own financial interests. Sound advice. But sound advice for more normal market conditions. The extenuating circ*mstances in Q1 2023 mentioned earlier prompted the U.S. Government to take drastic action, including President Biden declaring that no depositor will lose money.

More recently, a deep analysis of bank runs and failures was conducted by 2022 Nobel-winning economists, Douglas Diamond, Philip Dybvig and Ben Bernanke who produced extensive research and the now famous Diamond-Dybvig Model (1983). The D-D model dug deeply into the fact that banks have a natural maturity mismatch and therefore liquidity risk. Bank loans tend to have long maturities to match borrowers’ project needs while depositors prefer quick, easy access to their funds. Long-term assets funded by short-term liquid liabilities can result in high liquidity risk!

With adequate cash reserves and careful management, this is a manageable risk. In fact, this intermediation is the essential value service of banks. And this service allows banks to charge higher interest on loans than it pays to depositors. D-D assumes that, in general, savers’ needs for cash are random, but if deposits are diversified, redemptions are usually predictable and therefore manageable unless there is a disturbance in the market. But when there is a market event, the normal “low beta” for deposits (∂deposits/∂interest rates) can disappear quickly as it did at Silvergate, Signature, SVB and First Republic.

Even with granite columns and solid stone floors, banks are especially risky businesses. To illustrate, the debt/equity ratio for the S&P 500 is approximately 1X, whereas banks are closer to 10X. Despite deposit insurance, many depositors, especially corporate depositors, don’t want to be “the last one out the door.” Phrased differently, banks can find themselves in a Nash Equilibrium situation. If depositors do not panic and withdraw funds, the bank has a chance to work out of its liquidity difficulties. But if one depositor defects and withdraws, it is logical for other depositors to head for the exit too. Depositors at these four banks withdrew their funds swiftly, triggering the banks’ demise.

What’s next?

The government’s fast, high-profile, robust rescue of depositors in Q1 2023 was intended to provide confidence to retail depositors. It also gave corporate depositors time to adjust where and how much they deposit. The losers, of course, are the equity holders of the failed banks and the midsized bank sector in general. The KRE (SPDR S&P Regional Banking ETF) dropped by almost 33% in March 2023 and has not recovered. At this price level, the sector seems primed for consolidation, especially with supportive comments from U.S. Treasury Secretary Yellen in this regard. The Senate Banking Committee held a hearing on July 12, 2023, on the issue of bank industry consolidation in light of the four bank failures in the spring. Secretary Yellen has suggested more mergers could strengthen the banking system while Senator Elizabeth Warren, the committee’s Democratic chair, is skeptical of the argument.

CPE Course Library | Are you curious to learn more? Check out the GAMMA Library including over 300 hours of approved industry CPE courses and related timely articles. Click here to explore the full course listing, available CPE credits and registration for the GAMMA Library.

About Us| The SS&C Learning Institute is a division of SS&C dedicated to providing continuing education for today’s professionals. From a library of 250+ online CPE courses to microlearning articles and videos, our offerings are delivered by industry-leading subject matter experts and cover a wide variety of financial markets topics. .

Monthly Newsletter | to gain continued access to expert insights on the latest industry topics.

Why Do Banks Fail and What’s Next? 2023 Lessons and Predictions (2024)


Why Do Banks Fail and What’s Next? 2023 Lessons and Predictions? ›

2023 Lessons and Predictions. Banks can fail for many reasons, the majority of which fall into one of three broad categories: A run on deposits (leaving the bank without the cash to pay customer withdrawals). Too many bad loans/assets that fall sharply in value (eroding the bank's capital reserves).

What caused the banks to fail in 2023? ›

The IG's report blamed Signature's failure on company executives' prioritization of rapid growth over sound risk management practices. It also found that the bank's contingency funding mechanisms were insufficient, which proved decisive amid a run on deposits. The FDIC also received some blame.

What is causing the banks to fail? ›

Understanding Bank Failures

The most common cause of bank failure is when the value of the bank's assets falls below the market value of the bank's liabilities, which are the bank's obligations to creditors and depositors. This might happen because the bank loses too much on its investments.

Why are banks in the US collapsing? ›

Risky times. Heightened interest rates have already led to the most stringent credit standards and weakest loan demand from consumers and businesses in a long time in the US. Meanwhile, banks are dealing with other major challenges such as the plunge in demand for office space as a result of home working.

Why are US banks closing in 2023? ›

However, banks of all sizes are shifting investments away from physical locations and toward digital platforms. However, bank M&A slowed in both 2022 and 2023 amid higher regulatory scrutiny and broad uncertainty imposed by interest rates that surged over the past two years.

How to prepare for bank collapse 2023? ›

8 Things You Can Do Now to Prepare for a Possible Future...
  1. Maximize liquid savings. ...
  2. Make a budget. ...
  3. Cut back on unneeded expenses. ...
  4. Commit to closely managing your bills. ...
  5. Take inventory of your non-cash assets. ...
  6. Pay down your credit card debt. ...
  7. Get a better interest rate on your credit card.

How many US banks are in danger? ›

Consulting firm Klaros Group analyzed about 4,000 U.S. banks and found 282 banks face the dual threat of commercial real estate loans and potential losses tied to higher interest rates. The majority of those banks are smaller lenders with less than $10 billion in assets.

What happens to your money if a bank fails? ›

If your bank fails, up to $250,000 of deposited money (per person, per account ownership type) is protected by the FDIC. When banks fail, the most common outcome is that another bank takes over the assets and your accounts are simply transferred over. If not, the FDIC will pay you out.

Is the US bank in trouble? ›

Read the CFPB's order. Read the CFPB's 2022 action against U.S. Bank. In its previous action against the bank, the CFPB fined U.S. Bank $37.5 million for illegally accessing its customers' credit reports and opening checking and savings accounts, credit cards, and lines of credit without customers' permission.

Which four banks are in trouble? ›

About the FDIC:
Bank NameBankCityCityClosing DateClosing
First Republic BankSan FranciscoMay 1, 2023
Signature BankNew YorkMarch 12, 2023
Silicon Valley BankSanta ClaraMarch 10, 2023
Almena State BankAlmenaOctober 23, 2020
56 more rows

What banks are most at risk? ›

Which Bank Stocks Are Most at Risk of a Liquidity Crisis?
  • Zions Bancorp NA. (ZION)
  • Signature Bank. (SBNY)
  • Huntington Bancshares Inc. (HBAN)
  • SVB Financial Group. (SIVBQ)
  • First Republic Bank. (FRCB)
Mar 15, 2023

Are banks crashing in 2024? ›

WASHINGTON (TND) — The U.S. had its first bank failure of 2024 with federal regulators seizing control of Pennsylvania-based Republic First over the weekend, which comes a year after a string of larger regional banks collapsed in spectacular fashion and fueled fears of a run on deposits and shook faith in the financial ...

What is causing the banking crisis? ›

These include credit risk (loans and others assets turn bad and ceasing to perform), liquidity risk (withdrawals exceed the available funds), and interest rate risk (rising interest rates reduce the value of bonds held by the bank, and force the bank to pay relatively more on its deposits than it receives on its loans) ...

What caused the 2023 banking crisis? ›

Banking Turmoil 2023

The collapse of banks, such as Silicon Valley Bank and First Republic Bank, resulted from deficiencies in risk management and a lack of proactive supervision; they are unrelated to the bad loan practices of the subprime mortgage crisis of 2008.

Why are banks failing now? ›

Since the end of 2023, the 10-year treasury yield jumped from 3.86% to 4.5% as the Federal Reserve Board has been steadily raising rates to combat inflation. As rates go up, the value of long-maturity securities decreases, inflicting huge losses on many banks.

Are banks collapsing in 2024? ›

First Bank Failure of 2024 Near Anniversary of SVB, Signature, and First Republic Failures. The seizure and subsequent sale of Republic Bank comes a little more than a year after a series of bank failures that rocked the industry in 2023, as Silicon Valley Bank and Signature Bank shut down in March 2023.

Is the U.S. bank in trouble? ›

Read the CFPB's order. Read the CFPB's 2022 action against U.S. Bank. In its previous action against the bank, the CFPB fined U.S. Bank $37.5 million for illegally accessing its customers' credit reports and opening checking and savings accounts, credit cards, and lines of credit without customers' permission.

Is Citizens Bank in trouble in 2023? ›

On Friday, November 3, 2023, Citizens Bank was closed by the Iowa Division of Banking.

Is money safe in banks 2023? ›

Yes, if your money is in a U.S. bank insured by the Federal Deposit Insurance Corp. and you have less than $250,000 there. If the bank fails, you'll get your money back. Nearly all banks are FDIC insured.


Top Articles
Latest Posts
Article information

Author: Rev. Porsche Oberbrunner

Last Updated:

Views: 6128

Rating: 4.2 / 5 (73 voted)

Reviews: 88% of readers found this page helpful

Author information

Name: Rev. Porsche Oberbrunner

Birthday: 1994-06-25

Address: Suite 153 582 Lubowitz Walks, Port Alfredoborough, IN 72879-2838

Phone: +128413562823324

Job: IT Strategist

Hobby: Video gaming, Basketball, Web surfing, Book restoration, Jogging, Shooting, Fishing

Introduction: My name is Rev. Porsche Oberbrunner, I am a zany, graceful, talented, witty, determined, shiny, enchanting person who loves writing and wants to share my knowledge and understanding with you.