Bank failures send shockwaves through the financial system, leaving depositors and investors scrambling for answers. Since 2023, there have been six bank failures across the United States, raising concerns and questions about the stability of our financial institutions. In this post, we'll explore the recent bank failures, delve into their primary causes, and identify warning signs that could indicate a bank is in trouble.

Recent Bank Failures: 2023-2024

In 2023 and 2024, the United States witnessed a series of high-profile bank failures that underscored the vulnerabilities within the banking sector. While the specific circumstances of each failure varied, common themes emerged that shed light on the challenges banks face in maintaining stability.

Some of the notable bank failures during this period included:

1. Silicon Valley Bank: Known for its focus on tech startups and venture capital, Silicon Valley Bank faced significant losses due to inadequate risk management and a sudden withdrawal of large deposits, leading to a liquidity crisis.
2. Signature Bank: This bank's failure was precipitated by a combination of poor regulatory compliance and a high level of non-performing loans, which eroded its capital base.
3. First Republic Bank: First Republic Bank struggled with poor regulatory examinations and mounting non-performing loans, ultimately leading to its collapse.

Why Banks Fail

Banks can fail for a variety of reasons, often involving a combination of internal mismanagement and external economic pressures. Here are some of the primary causes:

1. Inadequate Risk Management: Poor risk management practices can lead to significant losses. This includes making risky loans or investments that don't pay off, or failing to hedge against potential risks.
2. Liquidity Issues: Banks need sufficient liquidity to meet their obligations. If a bank cannot quickly convert assets into cash to cover withdrawals or other needs, it can face a liquidity crisis.
3. Poor Regulatory Compliance: Banks are subject to strict regulatory standards. Failure to comply with these regulations can result in penalties, increased scrutiny, and ultimately, the risk of failure.
4. Economic Downturns: Economic conditions play a significant role in bank stability. During recessions or economic downturns, banks may experience higher loan defaults and reduced profitability.
5. Fraud and Mismanagement: Internal fraud or gross mismanagement can quickly erode a bank's capital and trust, leading to failure.

Warning Signs of a Bank in Trouble

While it's not always possible to predict a bank failure, there are several warning signs that could indicate a bank is in trouble including: being subject to recent enforcement actions by regulatory bodies, having high levels of non-performing loans, or having negative public perception which leads to a loss of depositor confidence. Because impending bank failures aren’t always obvious, it’s important for depositors to have a full understanding of FDIC insurance, what it does and does not cover, and why it’s an important part of a comprehensive cash management strategy.

Understanding why banks fail and recognizing the warning signs can help you make informed decisions about where to place your money. While bank failures are relatively rare, staying informed and vigilant can ensure that your deposits remain safe and secure. As the financial landscape continues to evolve, keeping an eye on the health of your bank and the broader economic environment is more important than ever.

Learn how Ampersand can help your organization with deposit management strategies. Contact Ampersand.