In the wake of three of the biggest bank failures in U.S. history over the past two months, Americans are increasingly jittery about the safety of their money, worried about instability in the banking sector and concerned that fear, whether justified or not, could result in additional collapses.
Over the past week, multiple midsize U.S. banks have watched their share prices fluctuate wildly — some losing nearly 90% of their value — as investors and depositors struggled to ascertain whether the same problems that affected First Republic Bank, shuttered on Monday, and Silicon Valley Bank and Signature Bank, both shut down in March, were widespread.
On Friday, investors seemed to regain some of their confidence in the sector, sending the share prices of many midsize banks back up. However, the broader environment of concern persists.
So far, investors’ unease does not seem to have prompted significant deposit flight — when customers transfer funds from a bank they fear might be unsafe to an institution considered less risky. However, the rush to the exits that preceded the collapse of Silicon Valley Bank transpired in under 48 hours, leaving some experts nervous about a repeat.
A broad market
The United States, unlike many countries, has an extremely diverse banking system, with thousands of companies holding bank charters.
In 2022, the Federal Deposit Insurance Corp., which insures individual bank accounts, covered deposits at 4,135 individual banks. The U.S. also is home to a significant number of credit unions, which are tax-exempt not-for-profit organizations that, like banks, accept deposits, provide transaction services and make loans.
The vast majority of U.S. banks are relatively small “community” banks that serve a limited geographic area and have at most a few branches.
However, sitting atop the U.S. banking industry are the four institutions — JPMorgan Chase, Bank of America, Citigroup and Wells Fargo — all of which have assets of more than $1 trillion.
Those four banks are widely assumed to be “too big to fail,” meaning that the federal government would intervene to prevent them from collapsing to prevent widespread damage to the banking system and the U.S. and global economies.
Who is ‘too big to fail’?
While there is general agreement that the four largest banks are too big to fail, there has long been debate about whether that label should apply to the banks in the next tier, about 20 institutions with $100 billion to $600 billion in assets.
Regulators muddied the water significantly with the failures of Silicon Valley, Signature, and First Republic banks, all of which had fallen into that second tier.
In the case of Silicon Valley and Signature banks, the FDIC announced that deposit insurance would be extended to 100% of deposits. Technically, the agency is obligated to cover only the first $250,000 in any individual’s or company’s accounts. However, FDIC leadership invoked an exception that allowed it to expand coverage when failing to do so might cause a systemic crisis.
When First Republic failed on Monday, the agency negotiated a deal with JPMorgan Chase, under which the larger bank assumed all deposits of First Republic at face value, completely protecting depositors from losses, at an estimated cost of $13 million to the FDIC’s deposit insurance fund.
The agency faced considerable criticism for its actions, with some speculating that a precedent had been set under which depositors at any failed bank could expect to be fully insured. The agency pushed back, saying that was not the case.
In the aftermath, many depositors at midsize banks began to wonder whether the problems that had brought down Silicon Valley, Signature and First Republic were present at their banks. They also worried whether the institutions holding their money were considered big enough to rate a federal rescue.
Regional banks in focus
Most of the concern has been focused on banks considered “regional” — second-tier institutions that are neither community banks nor trillion-dollar banks.
PacWest Bancorp, another California-based lender, was among the banks hit hardest by the stock market sell-off. The bank has a large concentration of customers in the venture capital space, many of whom keep deposits that are orders of magnitude larger than the deposit insurance cap. A similar customer base led the flight from Silicon Valley Bank.
PacWest, however, said that it did not experience heavier-than-usual deposit loss in the wake of the First Republic failure, though it did admit that it was in talks with potential acquirers.
Other banks whose share prices have been hammered include Western Alliance Bancorp, Zions Bancorp, and Comerica.
If bank customers lose faith in the safety and soundness of small and midsize banks, experts said, it will be bad for the banking system and the broader U.S. economy.
“It’s a very disturbing trend, because of its impact on smaller banks — not just community banks, but even some of the smaller regionals,” said Bert Ely, principal of the banking consultancy Ely & Co. “Once people make that shift, not everybody’s going to come back to smaller banks.”
Ely told VOA that in his view, the investor concern is overblown.
“All this nervousness, I think, is really misplaced, given the state of the economy,” he said, pointing out that U.S. markets remain strong and are not suffering from significant problems such as the collapse of the subprime mortgage market, which presaged the last major banking crisis.