If you think your cash is safe just because it’s in a bank with a “good reputation” or that you can’t be at risk of losing deposits in a bank failure because your bank is well established – think again. Throughout history, the United States has experienced several periods of significant bank failures, with 570 banks failing since the year 2001 alone[1].
Before we look at some of the most prominent bank failures in history, let’s first examine some of the common reasons banks fail.
Increased Losses and Issues with Capital
Banks face failure when they experience significant financial losses that erode their capital reserves, making it impossible to meet regulatory requirements or absorb additional losses. A primary driver is nonperforming loans (NPLs), where borrowers fail to make interest or principal payments for 90 days or more. These loans reduce a bank’s income, as interest payments dry up, and force banks to set aside reserves to cover potential losses, further straining capital. A decline in bank income often stems from reduced interest revenue, poor investment returns, or operational inefficiencies. When losses exceed capital, banks become insolvent, unable to meet obligations to depositors and creditors.
Overspecialization
Banks that heavily concentrate their portfolios in a single sector are vulnerable to sector-specific downturns. Overspecialization reduces diversification, amplifying risk when market conditions shift. For instance, Silicon Valley Bank (SVB) collapsed in 2023 after heavily investing in long-term U.S. Treasury bonds and loans to tech startups. When interest rates rose, bond values plummeted, and tech sector clients withdrew deposits in large volumes, triggering a liquidity crisis[2].
Lack of Core Deposits
Core deposits, or deposits that come from checking accounts, payment accounts, Certificates of Deposit, and other stable sources of income, form the backbone of a bank’s liquidity. Without a reliable deposit base, banks can struggle to fund loans or meet withdrawal demands, increasing the risk of failure. A strong core deposit base provides resilience, while its absence leaves banks vulnerable to sudden liquidity shortages.
5 of History’s Most Prominent Bank Failures
Below are five notable U.S. bank failures, each illustrating unique causes and the fact that size, reputation, and other objective measures of safety and soundness are not always good indicators of solvency.
Washington Mutual (WaMu) – 2008
- What Happened: Washington Mutual, once the largest U.S. savings and loan association, collapsed in September 2008. The FDIC seized WaMu and sold its assets to JPMorgan Chase for $1.9 billion[3].
- Why It Failed: WaMu pursued aggressive lending during the housing bubble and took on a large share of higher-risk subprime and option adjustable-rate loans[4]. When home prices crashed across the country, borrowers defaulted. By mid-2008, WaMu reported losses exceeding $6 billion, eroding its capital. A depositor run, with $16.7 billion being withdrawn in 10 days, triggered its collapse[5].
Silicon Valley Bank (SVB) – 2023
- What Happened: SVB, a key lender to tech startups, failed in March 2023 after a rapid deposit run overwhelmed its liquidity. The FDIC took control, and its assets were later acquired by First Citizens Bank[6].
- Why It Failed: SVB’s overspecialization in tech clients and significant investments in securities with long-term maturities created significant concentration. The bank had substantial unrealized losses on its HTM investment securities portfolio. This, coupled with poor communication regarding their plans to raise additional capital caused depositors to panic, and they withdrew $42 billion in a single day. A high proportion of uninsured deposits exacerbated the crisis[7].
IndyMac Bank – 2008
- What Happened: IndyMac, a major mortgage lender, was seized by the FDIC in July 2008 after depositors withdrew $1.3 billion in 11 days[8], costing the FDIC’s insurance fund $10.7 billion dollars[9].
- Why It Failed: IndyMac specialized in high-risk “Alt-A” mortgages, which did not require borrowers to document income or assets. When the housing market crashed, defaults skyrocketed, and nonperforming loans overwhelmed their capital[10].
Continental Illinois National Bank – 1984
- What Happened: Continental Illinois, once the seventh-largest U.S. bank, failed in 1984 after a massive deposit run. The FDIC orchestrated a bailout, infusing $4.5 billion to prevent systemic collapse[11].
- Why It Failed: The bank’s purchase of over $1 billion in energy-related loans from the failed Penn Square Bank put it in precarious financial shape, on top of other nonperforming loans the bank had within its portfolio[12]. Rumors of insolvency sparked a bank run, causing depositors to shift away from the bank[13].
Silvergate Bank – 2023
- What Happened: Silvergate, a crypto-focused bank, announced its voluntary liquidation[14] in March 2023 after a deposit run and mounting losses[15].
- Why It Failed: Silvergate’s heavy focus on cryptocurrency clients made it vulnerable to the 2022 crypto market crash. As clients like FTX collapsed, depositors withdrew $8.1 billion in Q4 2022[16]. Its investment in long-term securities[17], like SVB, led to losses when sold to meet withdrawals. A lack of core deposits and overreliance on crypto-linked funds were also a cause[18].
Lessons for the Future
Depositors should understand that all banks, regardless of management team, age, or reputation can become vulnerable to failure if the right circumstances arise. This is why taking advantage of deposit insurance is vital to protecting business operations and long-term success.
Have a Question about deposit safety? We’d love to hear from you.
[1] https://www.fdic.gov/resources/resolutions/bank-failures/in-brief/index#:~:text=There%20were%20570%20bank%20failures,2001
[2] https://oig.federalreserve.gov/reports/board-material-loss-review-silicon-valley-bank-sep2023.pdf
[3] https://www.cfo.com/news/jpmorgan-settles-with-fdic-over-wamu-deal/661362/
[4] https://abcnews.com/TheLaw/story?id=6021608&page=1#abcnews.go.com/TheLaw/story?id=6021608&page=
[5] https://www.npr.org/2008/09/26/95105112/washington-mutual-collapses
[6] https://newsroom.firstcitizens.com/2023-03-27-First-Citizens-Bank-Enters-into-Whole-Bank-Purchase-of-Silicon-Valley-Bridge-Bank,-N-A#:~:text=As%20part%20of%20the%20agreement,protection%20against%20potential%20credit%20losses.
[7] https://oig.federalreserve.gov/reports/board-material-loss-review-silicon-valley-bank-sep2023.pdf
[8] https://www.occ.gov/static/ots/press-releases/ots-pr-2008-29.pdf
[9] https://oig.treasury.gov/system/files/Documents/oig09032.pdf
[10] https://oig.treasury.gov/system/files/Documents/oig09032.pdf
[11] https://www.fdic.gov/bank/historical/history/235_258.pdf
[12] https://www.nytimes.com/1984/05/18/business/us-puts-together-7.5-billion-in-aid-for-illinois-bank.html
[13] https://www.fdic.gov/bank/historical/history/235_258.pdf
[14] https://www.fdic.gov/news/speeches/2023/spmar2923.html
[15] https://bpi.com/silvergate-bank-a-discount-window-success-story/
[16] https://www.jdsupra.com/legalnews/the-federal-government-bailing-out-3240562/
[17] https://bpi.com/silvergate-bank-a-discount-window-success-story/
[18] https://oig.federalreserve.gov/reports/board-review-silvergate-sep2023.htm
