In March 2023, a series of bank failures and liquidations sent shock-waves through the United States financial sector, prompting fears of a more widespread banking crisis.
The rapid decline of Silvergate Bank, Silicon Valley Bank, and Signature Bank marks a turning point in the nation’s economic landscape, leading to increased scrutiny on other regional banks and concerns about the stability of the U.S. financial system.
The first of these banks to fail, Silvergate Bank, announced on March 8 that it would undergo voluntary liquidation due to severe losses in its loan portfolio.
This was followed by a bank run at Silicon Valley Bank, which ultimately led to its collapse and seizure by regulators on March 10.
Just two days later, Signature Bank was closed by regulators, citing systemic risks.
These bank failures were the second- and third-largest in U.S. history, surpassed only by the 2008 collapse of Washington Mutual during the global financial crisis.
In response to the unfolding crisis, the Federal Reserve Board of Governors, Federal Deposit Insurance Corporation (FDIC), and the United States Department of the Treasury announced in a joint communiqué that extraordinary measures would be taken to ensure all deposits at Silicon Valley Bank and Signature Bank would be honored.
The Federal Reserve also announced the creation of the Bank Term Funding Program (BTFP), aimed at providing loans to banks and other eligible institutions.
The collapse of these banks can be attributed to various factors, including their significant exposure to the technology sector and the cryptocurrency market, as well as their investments in U.S. Treasury securities that declined in value as the Federal Reserve raised interest rates in response to the 2021-2023 inflation surge.
The banking crisis has led to depositors moving money from smaller banks to larger institutions, intensifying pressure on regional banks like First Republic Bank, which received a $30 billion lifeline from eleven of the largest U.S. banks, and Western Alliance Bancorporation, whose share price fell 47%. Moody’s has downgraded its outlook on the U.S. banking system to negative, citing the rapid deterioration of the sector’s financial footing.
U.S. President Joe Biden has asserted that the banking system is stable and that government intervention is not a bailout.
However, the New York Times reports that the banking crisis has rekindled fears of a recession as business borrowing becomes more difficult due to reduced lending from regional and community banks.
In an effort to calm market turmoil, the U.S. Federal Reserve has joined forces with the Bank of Canada, Bank of Japan, European Central Bank, and Swiss National Bank to organize daily U.S. dollar swap operations.
These coordinated actions aim to enhance liquidity and mitigate the impact of the ongoing banking crisis on the global economy.
What does this mean for local banks and communities?
The U.S. banking crisis poses challenges and uncertainties for local banks and communities.
Local banks may face reduced access to loans, lower customer confidence, stricter regulations, increased competition for deposits, and potential consolidations. Communities could experience limited access to financial services, economic slowdown, and increased financial vulnerability.
President/CEO Bob Gerads of MidMinnesota Federal Credit Union had this to share,
“The situation is obviously quite serious and is one more reason why banking with a community bank or credit union, like Mid Minnesota Federal Credit Union (MMFCU), is a great choice.”
The U.S. banking system is heavily regulated, and the Federal Deposit Insurance Corporation (FDIC) insures individual bank accounts up to $250,000 per depositor, per insured bank, for each account ownership category.
The MidMinnesota Federal Credit Union President at also mentioned,
“The money member owners entrust in credit unions is safe. MMFCU is insured by the National Credit Union Administration (NCUA), just as bank deposits are insured by the Federal Deposit Insurance Corporation (FDIC), up to $250,000 per individual. Additional coverage can also apply through the NCUA if an account is joint or has beneficiaries.”
It is not advisable for people to panic and withdraw all their money from banks due to the current banking situation.
However, it is essential to remain informed about the financial health of the banks where you hold accounts and to diversify your financial assets.
This can include having accounts at multiple banks, investing in other financial instruments like stocks, bonds, or mutual funds, and keeping a reasonable amount of cash on hand for emergencies.
MMFCU President/CEO Bob Gerads continued,
“Credit unions and banks manage money in three different ways: loans, cash (liquidity), and investments. MMFCU focuses primarily on loans to our members. We aim to loan back to our members more than 90% of the deposits other members are entrusting us with. They earn interest on their deposits and others in their community get low interest loans with that same money.”
Overall, it’s important to stay informed, maintain a balanced financial strategy, and avoid making impulsive decisions based on fear or misinformation.
If you have concerns about your bank’s stability or your financial strategy, it may be helpful to consult with a financial advisor or expert for personalized advice.