Bank Failures in Modern Times: Crises, Mergers and Bailouts

varsha sarkar

July 17, 2023

3:54 pm

Bank Failures

Ever wondered what transpires if a bank fails? Failures of banks can have negative effects that extend beyond the institution itself. Let’s examine some of the reasons for and effects of bank failures in this section.

Bank Failure Reasons

Fraud and poor management are a couple of the most frequent reasons for bank collapses. When bank executives engage in unethical or unlawful behaviour, it may damage their reputation with investors and consumers. Here are some instances of fraud and poor management that might lead to bank failures:

Insider trading: This happens when bank executives make transactions using secret information to give themselves an unfair edge in the market.

Embezzlement: This happens when bank executives take money for their own benefit.

Financial statement manipulation: This happens when bank executives alter financial reports to exaggerate the bank’s financial situation.

Economic recession and financial crisis are additional frequent causes of bank failures.

Consequences of bank failures

Failure of a bank may have serious repercussions on people’s lives and the whole economy such as:

Lost Customer Deposits 

The loss of client deposits is one of the most serious effects of bank collapses. This can be terrible for anyone whose money was in a bank that went down. Customers may be able to get their deposits back up to a certain amount if the bank is insured. However, consumers risk losing all of their funds if the bank is not insured.

Economic Instability

Banks are a critical part of the financial system, and their failure can have a significant impact on other financial institutions, as well as on the stock market and the broader economy. This can lead to a contraction in lending, a decline in consumer spending, and a slowdown in economic growth. The impact of a bank failure can be felt throughout the economy, affecting businesses, individuals, and even government institutions.

Job Losses

Finally, bank failures can result in job losses. When a bank fails, its employees may face layoffs or significant cuts to their salaries and benefits. This can have a ripple effect on the broader economy, as these employees may reduce their spending and contribute to a decline in economic activity.

Bank Failures in Modern Times

In recent months, there have been several significant bank failures that have caught the attention of the financial industry and the public. These failures have resulted in the transfer of deposits and assets to other financial institutions, highlighting the importance of stability and regulatory oversight in the banking sector. Let’s take a closer look at two notable bank failures that occurred in March and May of 2023.

Signature Bank, New York, NY

On March 12, 2023, Signature Bank, based in New York, was closed by the New York State Department of Financial Services. The Federal Deposit Insurance Corporation (FDIC) was appointed as the receiver for the bank. Subsequently, on March 19, 2023, the FDIC entered into a purchase and assumption agreement with Flagstar Bank, NA, a subsidiary of New York Community Bancorp, Inc. Flagstar Bank assumed a substantial portion of Signature Bank’s deposits and certain loan portfolios.

Silicon Valley Bank, Santa Clara, CA

Another notable bank failure occurred on March 10, 2023, with Silicon Valley Bank, based in Santa Clara, California. To protect depositors, the FDIC transferred all deposits of Silicon Valley Bank to Silicon Valley Bridge Bank, N.A., which operated as a ‘bridge bank’ under the management of the FDIC. The FDIC then sought potential bidders for the institution. Eventually, on March 26, 2023, the FDIC entered into a purchase and assumption agreement with First-Citizens Bank & Trust Company, based in Raleigh, NC. First-Citizens Bank acquired all the deposits and loans of Silicon Valley Bridge Bank, resulting in the placement of the bridge bank into receivership.

These recent bank failures underscore the importance of protecting depositors and ensuring the stability of the financial system. Regulatory agencies like the FDIC play a crucial role in facilitating the transfer of deposits and assets to stronger financial institutions, safeguarding the interests of depositors. Such actions aim to maintain public trust and prevent widespread economic disruption. By closely monitoring the banking sector and taking proactive measures, regulatory bodies seek to mitigate risks and prevent future bank failures.

Conclusion

In Conclusion, bank failures can have significant consequences for the wider economy, leading to economic instability and job losses. Mismanagement and fraud, as well as economic recessions and financial crises, are common causes of bank failures. Government interventions, such as TARP and quantitative easing, are often used to stabilize the financial system during times of crisis. However, bank bailouts remain controversial due to the use of taxpayer funds to rescue private financial institutions.

varsha sarkar

July 17, 2023

3:54 pm

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