A little while back, the American public was rattled by the sudden collapse of Silicon Valley Bank and Signature Bank within 48 hours of one another, quickly followed by signs that Credit Suisse and First Republic Bank could also fold.
That immediately fueled concerns that we were on the verge of another widespread banking crisis like the one ignited in 2008 which saw numerous bank failures as well as government bailouts to keep the entire system from collapsing.
In the aftermath of those events, The Associated Press and The University of Chicago's NORC Center for Public Affairs Research conducted a poll that showed that just 10% of Americans have "a great deal" of confidence in "banks and financial institutions."
Yet, perhaps now that we have had a chance to digest how these events played out, instead of eroding confidence in the US banking system, what transpired in the wake of these tremors in the banking system should build additional confidence in it.
After all, the system faced a test, and our worst fears about what could have happened as a result did not materialize. With that in mind, the following are five reasons why you should be confident in the US banking system despite the recent turmoil.
No. 1 — You are insured for deposits up to $250,000 if you are banking in an FDIC insured bank.
That means that if your account balance is $250,000 or less, and your bank fails you’re going to get your money back. If you are not sure whether your bank is FDIC insured, you can CHECK HERE.
If you have more than $250,000 in deposits you have a number of options such as:
- Distributing your deposits among multiple banks to limit your exposure
- Choosing a bank that is subject to routine stress testing by the Federal Reserve
- Using a bank that offers higher levels of FDIC insurance by using several carefully selected third-party banks to hold your funds
This is option “a” implemented for you by a bank that acts as your single point of contact. However, this is a nascent approach that is essentially untested.
No. 2 — Troubled banks like Credit Suisse and First Republic Bank that appeared to be on the verge of failure in fact did not fail.
Credit Suisse was acquired by UBS and 11 big banks deposited $30 billion of their own money into First Republic Bank to help restore confidence in the bank and avert a run on the bank that would have brought it down.
Moreover, even the banks that did fail have subsequently been acquired by stronger banks, which will help to keep depositors whole. That includes First Citizens’ acquisition of all of Silicon Valley’s deposits, loans and branches and New York Community Bank’s acquisition of a third of Signature Bank’s assets.
These moves signal strength in the system to compensate for occasional pockets of weakness unlike in 2008 where there was a widespread infection across the system due to a proliferation of subprime mortgages and mortgage-backed securities.
No. 3 — When the largest banks stepped in to rescue First Republic, they demonstrated that they’re looking out not just for the health of their own balance sheets, but also for the health of the broader industry.
Meanwhile, the banks in this category regularly submit to rigorous scrutiny by the Federal Reserve to ensure the health of their own balance sheets. This shows that there are layers of checks and balances in place to help keep the industry healthy.
For example, the largest banks ($250-plus billion) are stress tested against worst case scenarios every year by the Federal Reserve, and one tier below them ($100 billion to $250 billion) is stress tested every other year.
The Associated Press and The University of Chicago's NORC Center for Public Affairs Research conducted a poll that showed that just 10% of Americans have "a great deal" of confidence in "banks and financial institutions."
No. 4 — Immediately following the SVB and Signature failures, $120 billion was moved out of small- and mid-sized banks into the nation’s largest banks.
Still, this did nt result in failures of any other banks even though First Republic teetered for a bit. Translation: The system stretched but did not break.
No. 5 — Due to all of the publicity around troubled banks, depositors are more knowledgeable about the banking system and more aware of scenarios where they need to exercise higher levels of caution.
For example, if your bank is pioneering a new business model or if it is dominated by a niche group of customers, those are scenarios that call for more caution.
Both Silicon Valley Bank and Signature Bank had niche customer bases, which ultimately played a pivotal role in their demise. That doesn’t mean that depositors should move their money away from banks that fit this profile, but it does mean they should be cautious and periodically check for whether there might be any kinks in the bank’s business model that would put their money at undue risk.
These points are not suggesting that the banking system is immune to challenges. There still are some to be sorted out, but they do demonstrate it is resilient even in the face of a bit of adversity.
Marbue Brown is an Economic Policy Expert & Financial Services Pro that spent time as a Customer Experience Executive at JP Morgan Chase. He is the author of two books, "Blueprint for Customer Obsession" and "The Clinton Economic Boom (and other myths of the Clinton Presidency)." He also is founder of The Customer Obsession Advantage, a firm dedicated to helping companies achieve transcendent business results through Customer Obsession.
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