The recent news of the banking crisis affecting SVB, Signature Bank, Silvergate Capital Corp., and Credit Suisse has dominated the headlines. Banking crises have been going on since the dawn of modern banking and continue to remain a risk that individuals should prepare for.
To protect yourself in these troubling times, you should understand what causes a banking crisis and the steps you can take to help ensure your financial security.
What Is a Banking Crisis?
A banking crisis occurs when a bank experiences a sudden loss of confidence in its ability to repay outstanding debts and loses the ability to provide adequate liquidity for its depositors, creditors, and other stakeholders. Banking crises are usually caused by mismanagement of funds, inadequate regulations, or an overreliance on risky or volatile investments.
Silvergate was the first to fall in the current crisis, as it could not meet its financial obligations. It started with involvement with Sam Bankman-Fried's derivative platform, FTX, which caused liquidity issues.
SVB followed soon afterwards due to volatility in their stock prices after news of plans to float the company shares. The shares dipped after the report and potential receivership by the Federal Reserve.
Signature and Credit Suisse's collapse were a result of customer flight. Customers ran lost confidence and withdrew their funds from both banks. This caused a liquidity crunch that forced them to close their doors.
The History of Banking Crises
This is not the first banking crisis to have affected the world. In the United States, the 1907 Banking Crisis and the 1929 Great Depression are some of the biggest financial catastrophes in US history.
The 1907 crisis was caused by a "run" on banks due to rumors of mismanagement. The Federal Reserve Act of 1913 was passed in response to the crisis. The act established the Federal Reserve System and set up a system of bank regulations.
In 1929, after a series of panics, runs on smaller banks, speculation in the stock market, and a lack of regulation led to the Great Depression. The FDIC (Federal Deposit Insurance Corporation) was created to respond to this crisis. The intention was to protect customers' deposits up to a certain amount in case of bank failure.
What Does FDIC Do?
The FDIC protects funds deposited in banks up to a certain amount. Suppose a bank fails and is unable to meet its obligations. In that case, the Federal Deposit Insurance Corporation will provide deposit insurance for up to $250,000 per account (in most cases).
The FDIC regulates banking activities and ensures banks follow responsible risk management practices. This helps provide a certain level of stability for customers.
If your bank is closing, you must act quickly to protect your funds. The FDIC works with the failed institution and provides a bridge loan or assistance finding another financial institution to take over the deposits. You should contact the FDIC or the institution's customer service line for more information.
Banking crises can be devastating to families and businesses alike. However, understanding the underlying causes of a crisis and taking proactive steps to protect your funds can help you weather the storm.
Keeping an eye on regulation changes, diversifying investments, and staying informed about financial news are all important elements in protecting your assets during a banking crisis. Additionally, it is essential to understand the FDIC and what it can do to help in case of a bank failure. Taking these steps can help protect your money, so you don't end up as one of the victims of a banking crisis.