What’s Going on with Bank Failures?
Key Points – What’s Going on with Bank Failures?
- There Have Been Three Bank Failures in the Past Week
- Where Are These Bank Failures Happening?
- A Breakdown of Bank Failures—How Did They Happen?
- It’s Time to Do Some Research, Not to Panic
- 4 Minutes to Read
Three Bank Failures in One Week
As you are all likely aware by now, there have been three bank failures in the U.S. in the last week. And more are under scrutiny and pressure by regulators and shareholders alike. Understandably, people are getting a little nervous about the bank failure situation and want to know what’s going on.
More Bank Failures to Come?
Of course, people are asking if their bank could be the next. For those of you in the Midwest, you probably don’t have too much to worry about. As of March 15, there has only been one bank failure apiece in Kansas and Missouri among banks with at least $1 billion in assets since 1970. Both occurred in 2010 because of the Great Financial Crisis. So, the odds of banks in the Kansas City area being safe is high.
A Brief History of Bank Failures in the U.S.
Since 1970, there have been 92 bank failures with assets in excess of $1 billion. Twenty-two of those occurred during the saving and loan debacle in the late 1980s and early 1990s. Sixty-two of those occurred between 2008 and 2011 because of the Great Financial Crisis. The remaining three bank failures have occurred this year.
Of the 92 bank failures on this list, 24 of them were in California. No other state even comes close to California’s poor record on bank failures. The next closest states are Texas and Illinois with eight bank failures apiece.
Interestingly, only 24 of the 50 states have had a bank failure with more than $1 billion in assets. The U.S. territory of Puerto Rico has had four with three of them in 2010 and one in 2015. That means that 26 states have had no bank failures with more than $1 billion in assets.
So, how many banks are there with over 1 billion dollars in assets? According to the Federal Reserve Bank, there are 812 that meet that criteria. I find it interesting that three of the top four largest banks in the U.S., all with more than $1 trillion in assets, are in states that have not experienced a bank failure in this category. They are Bank of America in North Carolina, Citibank in Sioux Falls, South Dakota, and Wells Fargo in Sioux Falls, South Dakota. And the largest bank in the U.S., JP Morgan Chase, is in a state (Ohio) that has only had one bank failure in the category. Of the top 10 banks in the country, seven are located in states that have had no bank failures in this category.
Knowledge Is Power
Feeling better? You should. I know things are scary right now, and they could get worse as history shows. But you shouldn’t start stuffing money in your mattress. Use the list I linked here to find your bank. Rather than panicking, use the Federal Reserve Bank’s list that I just mentioned and do your own research on your bank. Make decisions about your banking future with the knowledge you gain from that research. Panic and fear are your enemy, but knowledge is power.
The Roots of Bank Failures
The problems affecting banks today are related to interest rates rising so quickly over the last two years and the way banks make money. Without going too deep here, I’ll give you a short explanation.
When a bank accepts your deposit, they become a borrower. They owe you the money back, with interest, at some point in the future when you decide to spend it or make a withdrawal. To make money, the banks turn around and lend the money you’ve given them to people buying homes, cars, furniture, etc. at a rate higher than they are paying you. The difference in the rate they pay you versus the rate they are collecting on the loans is their profit.
The Impact of Rising Interest Rates
In 2020, interest rates were very low—essentially zero—so they didn’t have to pay their depositors much interest on their deposits. At that same time, they were making home loans at around 3% to 4% on 30-year fixed notes. Those loans will only ever generate that 3% to 4% interest back to the bank.
Fast forward to today when the Fed Funds rate is at 4.75%. With short-term treasuries yielding almost 5% and CDs paying almost 5%, the banks are having to pay their depositors far more interest on their new deposits than they are collecting from their outstanding loans. Can you say pay cut?
Add this to the fact that banks have reserve requirements that require them to hold a certain amount of money in safer investments like treasury bonds, which got killed by the Fed rate hikes, and you have the makings of a liquidity squeeze. Refer to my article on bonds and duration for an explanation. Suffice it to say, as interest rates go up, the value of bonds you bought in a low interest rate environment goes down. So, instead of being a source of additional revenue, the bonds that banks bought back in 2020 and 2021 are a liability.
Banks need to allow their bonds set aside for reserve requirements to mature so that they can get their money back, since those treasuries will mature at par value. If they sell them now to meet redemption requests that are outside of normal parameters, they lock in the embedded losses on the reserve portfolio and compound the liquidity issues they are already facing. Which is why I said earlier that panic and mattress stuffing is not the appropriate response to the recent bank failures.
The Gift of Calmness
Research, knowledge, and staying calm are the appropriate responses. Remember, to the news media, if it bleeds it leads. They love a good “crisis” to get their audiences all worked up. You worked up equals clicks and views and profits. Don’t give them what they want. Give yourself the gift of calmness.
If you have any questions about these recent bank failures and/or are uneasy about what the future holds, connect with your advisor. We also understand that the sense of panic can come from the news to your friends and then to you. Well, we can share the gift of calmness with them as well during a 20-minute “ask anything” session or complimentary consultation with one of our CFP® Professionals.
It All Starts with a Plan
During that meeting with them, we’ll also highlight how a financial plan can also bring them clarity, confidence, and control so that they can live their one best financial life. It’s our hope that they’ll also realize how there’s much more to financial planning than investments and saving. There are far too many people who end up panicking about things like taxes, insurance, and estate planning once they’re wanting to retire, and it’s because they don’t have a financial plan.
We’re giving them an opportunity to start building a financial plan that’s unique to them with our financial planning tool. It’s the same industry-leading tool that our CFP® Professionals use with our clients, and they can use it at no cost or obligation. They can begin building their plan by clicking the “Start Planning” button below.
Whether you have questions or you have friends who need questions answered, we’re here to help. Panic has no place in financial planning, and we’re doing our part to keep it that way.
Investment advisory services offered through Modern Wealth Management, LLC, an SEC Registered Investment Adviser.
The views expressed represent the opinion of Modern Wealth Management, LLC, an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.