The US banking industry has experienced a recent wave of bank failures, raising concerns about its stability. The collapse and sale of the Silicon Valley and First Republic banks represent the second and third-largest bank failures in US history.
Despite these failures, President Joe Biden has reassured Americans that the banking system is secure. Additionally, the Federal Deposit Insurance Corporation (FDIC) has taken measures to cover the losses of both insured and uninsured deposits. However, many policymakers emphasize the importance of remaining vigilant and providing flexible financial oversight to prevent further bank failures.
What is a bank run?
A bank run is the sudden withdrawal of a significant amount of money, leading to the depletion of a bank’s cash reserves.
Banks are only required to keep a fraction of their total deposits on hand[1], so, when many depositors withdraw funds at the same time, banks may not be able to give everyone back all their money. This can result in the bank becoming insolvent, meaning it cannot meet its financial obligations to its customers, leading to a bank failure.
How many bank failures has the US had?
The US has had over 3,500 bank failures, most of which took place over three distinct periods.
The Great Depression, which lasted from 1929 to 1941, was the nation’s first period of bank failures. At least 370 banks collapsed.[2]
The next period accounts for over half of all bank failures in the US: the banking crises of the 1980s and 1990s. The crises were sparked by a variety of factors, including changing regulatory laws, increased competition, and economic distress from the savings and loan industry.
More than 2,300 banks closed between 1980 and 1994, costing more than $277 billion when adjusted for inflation.[3]
In 1989, 531 banks failed — the most in a single year.
The most recent period was during and following the Great Recession. Between 2007 and 2014, 523 US banks failed, costing over $86 billion when adjusted inflation.
Four banks insured by the FDIC failed in 2020, compared to 157 in 2010.
The four banks had no estimated losses.
What happens after a bank fails?
The US has several measures to mitigate the impact of bank failures.
First, there’s the FDIC, an independent government agency which provides insurance to depositors who lose their money after a bank fails. The FDIC covers up to $250,000 per depositor, insuring both people and businesses.
The Federal Reserve also acts as a lender–of–last resort when banks need short-term loans to stay afloat and meet financial obligations. The Federal Reserve does this to reduce the potential for further bank runs and restore confidence in the economy.
The government may also provide direct financial support in an emergency. In the case of the Silicon Valley Bank, the government is ensuring that depositors will have access to all their money from the bank.
Large banks may choose to purchase a failing bank, covering its financial obligations in order to absorb the smaller banks' assets and gain new customers quickly.
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[1] This is also known as fractional-reserve banking.
[2] The FDIC does not have data on bank failures prior to 1934 and does not have the financial costs associated with bank failures before 1972.
[3] Inflation adjusted in 2021 dollars.
