The recent collapse of two American banks, Silicon Valley Bank and Signature Bank, has a lot of people worried. That’s understandable. There are echoes of 2008, though the causes this time are quite different and the threat of a broader collapse to the industry appears much lower.
Let’s take a quick look at what happened. Silicon Valley Bank was hit with what the Associated Press called “a traditional bank run.” It’s familiar to anyone who has seen “It’s a Wonderful Life.” People become concerned about their money, rush to withdraw it, and the bank essentially runs out of funds.
Signature Bank, by contrast, was seized by federal regulators after customers, spooked by Silicon Valley Bank’s failure, withdrew more than $10 billion in assets. And some have questioned whether the pre-emptive move was made on the basis of real risk or the bank’s holdings.
In both cases, the banks’ risk exposure was concentrated heavily in volatile sectors. Silicon Valley Bank was, unsurprisingly, heavily invested in the tech industry. Signature Bank was deep into cryptocurrency, with something like $16.5 billion in digital asset deposits.
While the events are not believed to presage anything like the 2008 shocks that threatened the entire banking industry, the unease is understandable. The collapses 15 years ago hurt a lot of people. They prompted the most significant economic downturn in years. People remember it, and it is completely understandable that when they hear about a bank failure today their minds return to 2008.
That response holds its own risk for the banking industry, albeit indirectly. When people feel threatened, they look for safety. And, for many, the idea that there’s safety in numbers applies to corporations as well.
If people flee local banks for national behemoths, it’s not inconceivable that they could place pressure on small and mid-sized banks that isn’t warranted. And those small to mid-sized banks play important roles in their communities. We don’t want to see people harm their local business base by reacting to something that isn’t there.
Consolidation when people move their accounts to a handful of national players raises its own issues. Part of the challenge in 2008 was the number of banks deemed “too big to fail.” If customers flee to a small handful of institutions they can inadvertently recreate that scenario.
What would we be asking our bank if we had concerns? First, we’d remind ourselves that most banks are well capitalized. They have the money they need to operate. And most aren’t so heavily invested in a single sector of the economy that fluctuations within it pose an existential threat.
So we’d ask about things like where the bank itself is invested. Reports will show a bank’s capital and how many of the bank’s loans are not currently paid up. There are websites that track exactly that kind of information. You want to make sure the site itself is credible, but that goes for anything online.
Is the bank federally insured? The FDIC will cover losses of up to $250,000 for customers. That safety blanket covers the vast majority of people. The coverage also means that, just as banks themselves are generally diversified in their investments, it’s not necessarily a bad idea to diversify your own savings.
Generally speaking, the U.S. banking industry is safe. It plays by a known and well-established set of rules, and has to meet regulations most of us aren’t even aware of. No one can guarantee there won’t be occasional problems, but the basic system is designed to minimize those and respond effectively when they occur.
We don’t blame people for being rattled by the headlines that emerged about these two banks. But right now we don’t see cause for panic about the overall health of the industry.
