What caused the banking crisis, and is it over?

Bank failures are rare and often associated with recessions. Since 2001, there have been 563 bank failures, most of which resulted from the 2007 – 2009 recession. Silicon Valley Bank and Signature Bank were the first banks to fail since October 2020.¹ Let’s start by explaining what happened to Silicon Valley Bank (SVB) and the degree to which savings are at risk with any bank.

When you have your money in a savings or checking account, the bank will typically put aside some portion of funds (roughly 15%) to handle withdrawals and then invest the rest, with the goal being to make more money than they are paying in interest on savings accounts. For example, the banking institution may lend out some of the 85% of funds received in the form of mortgages or personal loans and then purchase Treasury securities with the rest.

In the case of SVB, they received billions of dollars from start-up companies during the pandemic when interest rates were low and when many new start-ups were formed.  The bank invested a high percentage of these funds in longer-term bonds, such as Treasury securities. As interest rates started to rise in March of 2022, newly issued Treasuries started to pay more interest than previously issued securities. As this happened, SVB recognized that if they tried to sell their lower-yielding bonds, they would not be worth what they paid.

As SVB depositors saw returns on short-term investments rising (especially companies with millions of dollars on deposit), they started withdrawing deposits from the bank at a pace that was greater than SVB’s available funds. This left the bank with two options: (1) sell securities at a loss or (2) try to raise capital by issuing stock or bonds. The bank tried both of these actions. They took a big loss when they sold their investments, and they were not able to raise enough capital.

So, to avert a crisis, the government took over the bank and declared that no customers of SVB would lose any of their deposits. That’s good news for SVB customers, but it doesn’t mean that the next bank with the same problem will be bailed out in a similar fashion.

Let’s transition now to the perspective of an average person depositing funds at any bank. The Federal Deposit Insurance Corporation, or the FDIC, insures up to $250,000 deposited in any single checking or savings account. If a husband and wife have a joint account, they are each insured up to $250,000. If a single person wants to insure $500,000, they would need to open an account at two separate banks and deposit $250,000 in each.

For the vast majority of people, if your savings or checking account balances are less than $250,000, you are insured by the FDIC from any potential losses.

Now, let’s take a step back and consider whether the “banking crisis” is over now or if there are still risks for a large number of banks. First, much of the crisis has been caused by a rapid rise in interest rates, which has led to depositors moving their funds to try and get higher returns. If a bank doesn’t have enough money put aside or access to funds quickly enough, it could face the same problem as SVB. There is a great deal of speculation on whether the Federal Reserve is done raising interest rates, but one thing we do know is that inflation is still much higher than the target the Fed set, which is 2%.  If interest rates keep rising, more banks or financial institutions may find themselves with too many customers demanding their funds.

Secondly, the commercial real estate (CRE) market could be vulnerable to a crisis. Empty offices due to the pandemic and hybrid work are weighing on the CRE market. According to the Conference Board, US domestically chartered banks hold nearly 60% of CRE loans. Defaults on CRE loans are on the rise, stoking concerns that this might negatively impact US banks at a vulnerable time.²

These are only a few of the risks to our economy that could impact banks and keep them on the edge or in the midst of a crisis. Which leads to the question: “What can an employer do to help employees that are stressed about whether their savings are at risk?”

For employees seeking help with how they might handle savings, a banking crisis, or any financial goals or challenges, MSA is here to empower all employees to take control of their finances. If you currently have MSA services directly or through one of our providers, remind employees to take advantage of working with a Money Coach and the MSA Digital Platform.

If you don’t already have access to the MSA financial well-being program, you can learn more about how you can partner with MSA to integrate financial well-being into your employee benefits package by visiting mysecureadvantage.com/why-msa.

¹ “Failed Bank List.” FDIC, May 1, 2023. Web. Accessed May 23, 2023. https://www.fdic.gov/resources/resolutions/bank-failures/failed-bank-list/

² Peterson, Dana M. and Mitchell Barnes. “2023 Banking Crisis: US By the Numbers.” The Conference Board, May 14, 2023. Web. Accessed May 23, 2023. https://www.conference-board.org/topics/recession/2023-banking-crisis-US-by-the-numbers