This article was updated on May 3, 2023, to reflect the failure of First Republic Bank
Bank failures are not uncommon during times of economic stress. From the first financial panic of 1819 to the banking turmoil of 2023, several major economic events have caused banks to fail at high rates. Fortunately, the losses associated with bank failures are no longer a threat to individuals and businesses that secure adequate FDIC coverage.
History of U.S. Bank Failures
In its short history, the U.S. has seen its share of economic panics that have resulted in runs on banks and bank collapses. Although the failure of Silicon Valley Bank is still very fresh in our minds, it makes sense to start at the beginning.
The Panic of 1819
The history of bank failures in the U.S. begins just over 40 years after the Declaration of Independence was signed. In 1819, the aftermath of the Napoleonic Wars led to global market adjustments that tossed the U.S. into its first of many financial crises. England and France had been fighting for centuries, and the U.S. reaped the benefits by supplying agricultural products to both feuding countries. When they stopped fighting, the demand for U.S. products tumbled.
To compound the effects of this crisis, rampant speculation in public lands fueled by loose issuance of paper currency by governments drove the economy into a tailspin that persisted through 1821. During this crisis, the Second Bank of the United States [SBUS] – the successor to the First Bank of the U.S. – was heavily impacted and began reducing the credit it made available to state-chartered banks. Without this flow of funds, state-chartered banks began to collapse. Because the FDIC had yet to be created, when a bank failed, its customers lost their deposits. This led to runs on banks which led to more bank failures.
Despite the government’s efforts to curtail the damage, many farmers lost everything. This crisis led to several state-charted bank failures and paved the way for Andrew Jackson to close the SBUS in 1833.
The Panic of 1837
The financial crisis of 1837 began a recession that lasted until the mid-1840s. Some of the issues that are thought to have caused this panic were speculative lending practices in western states, a sharp decline in cotton prices, and a land price bubble. Andrew Jackson’s financial policies are also considered a major contributing factor to this crisis.
During this time, 343 out of 850 U.S. banks closed entirely. In addition, 62 banks partially failed, and numerous state banks were stressed to a point where the state banking system never fully recovered. Without the FDIC to protect them, many Americans lost their life savings.
The Panic of 1873
Like the prior crises, and those to come, the Panic of 1873 was greatly impacted by rampant speculation, but this time in railroads. Germany and the United States were also demonetizing silver at the time, which could have contributed to the excessive inflation and high interest rates being experienced by the United States. The U.S. had arguably over expanded after the conclusion of the Civil War, and major fires in Chicago (1871) and Boston (1872) had already strained bank reserves before this crisis – creating a situation that was likely to implode.
In September of 1873, Jay Cooke & Company [JCC] began having issues marketing railway bonds. Having invested heavily in railroads, JCC became insolvent. On September 18, 1873, they declared bankruptcy. This began a string of bank failures that led to the United States’ first great depression. This was later dubbed the “Long Depression” after the incidents of 1929 took its original name. During this crisis, the New York Stock Exchange suspended trading for the first time in history. And again, since there was no FDIC, many Americans lost everything.
The Panic of 1907
In 1907, two speculators, F. Augustus Heinze and Charles W. Morse, attempted to corner the stock of United Copper, but they didn’t succeed and suffered major losses. After this incident, Americans rapidly withdrew funds from banks associated with these two men. A few days later, these bank runs led the New York Clearing House to announce that Heinze member banks, such as the Mercantile National Bank, had been deemed insolvent. F. Augustus Heinze, president of Heinze Bank, was forced to resign which intensified the bank runs. However, the New York Clearing House came to the rescue and offered these banks loans to make sure they could meet their depositors’ withdrawals, which effectively stopped the runs on their banks.
While the runs on the Heinze banks were effectively stopped, the contagion spread to trust companies. By October, there was another bank run on Knickerbocker Trust – which had been associated with Morse. Knickerbocker Trust was then temporarily saved by a loan from the National Bank of Commerce, but this did not last. Later in the month, the Knickerbocker Trust run intensified which led to their failure. The failure of Knickerbocker kicked off a run on New York based financial institutions. The trust companies that existed in New York at the time have many parallels with the shadow banks of today.
To combat these bank runs, the New York Clearing House Committee met and formed a panel to facilitate the issuance of clearing-house loan certificates. These certificates were the predecessors to the discount window loan system that is still operated by the Federal Reserve today. In fact, the effects of this crisis and the steps taken to mitigate it formed the intellectual basis for the Federal Reserve Bank.
The Great Depression: Stock Market Crash of 1929
The official start of the Great Depression was the stock market crash on ‘Black Tuesday,’ October 29, 1929. Again, wild speculation during the ‘roaring twenties’ was a contributing factor to this collapse. Unemployment was already growing before the panic, but stock prices continued to rise. In addition, many companies were less than honest with their investors about their financials during the time leading into the crash.
Later in 1930, the U.S. began experiencing bank runs due to this crisis, which led to a massive wave of bank failures. The first of those bank runs was experienced in Nashville, Tennessee, which triggered a wave of runs across the Southeast. The U.S. financial system saw more bank runs in 1931 and 1932.
When President Roosevelt instituted a banking holiday in 1933, all banks were ordered to cease operations until they were determined solvent. This was the beginning of the end of the bank runs, but the pain was far from over. Overall, these runs, and the financial impact of the stock market crash resulted in the failure of about 9,000 banks throughout the 1930s.
This catastrophic event led to the creation of the Federal Deposit Insurance Corporation [FDIC] on June 16, 1933. The FDIC guaranteed that depositors would not lose their deposits in member banks in the event of a bank failure, up to a certain limit. Since the creation of the FDIC, bank runs no longer pose a major threat to the U.S. banking system. The FDIC now proudly states that “since 1933, no depositor has lost a penny of FDIC-insured funds.”
Savings and Loan Crisis of the 1980’s and 1990’s
The Savings and Loan [S&L] crisis began in the 1980s and extended through the early parts of the 90s. This was a crisis spawned again by speculation and regulations that didn’t match market conditions.
The U.S. had just weathered the stagflation of the 1970’s which produced historically high interest rates. These high rates paired with the regulations that limited S&Ls ability to compete put them at a disadvantage. By 1982, S&Ls were losing as much as $4 billion per year after having profited strongly in 1980. More than 1,000 S&Ls had failed by 1989, and those failures continued into the early 90s. However, this time the FDIC protected Americans from losing their insured funds due to bank failure.
The Great Recession
In 2008, the U.S. began to experience the impacts of the greatest economic downturn since the Great Depression. This period of economic contraction actually began in 2007, but it became a full-blown crisis in March 2008 when Bear Stearns began experiencing liquidity issues. Later that year, two investment banks became insolvent – Bear Stearns and Lehman Brothers. This recession did not officially end until June 2009.
There were many economic factors that combined to initiate the Great Recession. However, rampant speculation – this time in the housing markets – was again a major contributing factor.
After this crisis, congress passed regulatory reforms that included increased capital requirements and “stress tests” in the Dodd-Frank Wall Street Reform and Consumer Protection Act. These regulations were designed to ensure that banks who were “too big to fail” were well capitalized so they could weather the next crisis. Since this time, these regulations have been loosened.
From 2008 through 2015, more than 500 banks failed as a result of this crisis, however, due to the protection extended by the FDIC and NCUA, insured deposits were safe once again. For comparison, in the 7 years prior to 2008 only 25 banks failed. Because of the protection afforded by the FDIC and NCUA, the only bank runs were on “shadow banks” who do not have government protection.
COVID-19 Pandemic of 2020
Periods of severe economic stress often coincide with an increased risk of bank failure and the COVID-19 pandemic was certainly stressful for both people and the economy. However, the pandemic recession was unique in many ways. For one, it was not caused by over-speculation or unsavory lending practices. Secondly, banks were strong, with rising deposits and increased oversight as a result of the regulations passed after the Great Recession.
The strength of the banking system helped to stave off the bank failures that would typically be expected during such a deep economic contraction. In addition, the unprecedented stimulus during this time led to further increases in bank deposits, rather than the rush to withdraw funds seen during previous recessions. For these reasons, only 4 banks failed in 2020 and none failed in 2021.
While only a few banks collapsed during the most recent recession, the threat of bank failures remains a key concern for companies with significant cash reserves. Fortunately, the FDIC now exists to protect business deposits.
Bank Failures in 2023
Following the COVID-19 pandemic, inflation rose to rates that hadn’t been seen since the early 1980s. In response, the Fed implemented several interest rate hikes in rapid succession. These interest rate increases took their toll on some businesses and regional banks.
Silicon Valley Bank [SVB] had invested heavily in Treasury bonds and when yields for these securities rose, their values fell dramatically. When many of the bank’s tech startup customers needed to access their funds at the same time, SVB was forced to sell their Treasuries at a significant loss. As depositors began to recognize the bank’s liquidity issues, they rushed to withdraw funds from the struggling bank.
Like with bank runs of the past, SVB was unable to recover. The bank failed in March 2023 – marking the largest bank failure since 2008 and the second largest bank failure in American history. Around the same time, Signature Bank was in a similar situation to SVB. This bank also failed, becoming the third largest U.S. bank failure of all time.
In response to these significant failures, the FDIC took historic action to restore faith in the banking system and protected all deposits – even those above the traditional limit. However, it is important to note that the FDIC limit did not change, nor did the standard process for protecting deposits. Instead, the extended protection offered to depositors of Signature Bank and SVB was an exception to the normal operating procedure.
Then on May 1, First Republic Bank also collapsed. This failure supplanted SVB as the second largest bank failure in American history. This time, the FDIC facilitated the sale of the bank to J.P. Morgan Chase almost immediately and bank deposits were transferred within a business day. Due to the FDIC’s quick action, depositors’ funds were preserved during the transfer.
Protecting Your Cash
Businesses should keep an eye on the economic situation and ensure their deposits are safe. To do this, companies should ensure all of their deposits are protected by FDIC or NCUA insurance. Currently, every individual and business depositor at a member financial institution is insured up to $250,000. This insurance is backed by the full faith and credit of the U.S. government.
Protection for more than $250,000
Those businesses with more than $250k in cash should be careful not to keep it all at the same financial institution. FDIC insurance only covers up to the $250k limit per investor, per depository institution. This means that businesses can spread their money among many different financial institutions to achieve protection for all their funds, above and beyond the $250k limit. However, this creates a lot of work in managing multiple banking relationships, statements, and reconciliations.
Thankfully, modern financial technology [fintech] has delivered a solution. Our company, the American Deposit Management Co. [ADM], has developed proprietary fintech that spreads business cash among our network of hundreds of banks and credit unions to achieve full FDIC and NCUA coverage. This all happens with a simple application, a single deposit, and a single unified monthly statement. We call this concept Marketplace Banking™ and this revolutionary technology also provides next-day liquidity and competitive interest rates. The best part is our clients get this all while keeping their current financial institution.
If you need extended protection for your business deposits, don’t hesitate to contact a member of our team. Our team is our secret sauce, and you’ll understand that when you work with us.
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