What Does Bank Failure Mean for the Average Person?
By, Jeremy Reif
If you have deposits with a failed bank, you may lose some or all of your funds. However, if the bank is insured by the Federal Deposit Insurance Corporation (FDIC), your deposits should be protected up to a certain amount. If you have investments with a failed bank, you may also lose some or all of your money, depending on the nature of the investment. Additionally, bank failures can have broader implications for the economy, such as decreased access to credit and a loss of confidence in the banking system.
Federal Reserve Intervention,
When a bank like Silicon Valley Bank (SBV) is taken over by the Federal Reserve (Fed), it means that the bank has been deemed to be in financial trouble and the Fed has determined that the bank’s failure could have a negative impact on the broader financial system.
Typically, the Fed will work with the troubled bank to try to address its financial problems through various means, such as requiring the bank to raise additional capital, reduce its risk exposure, or improve its management practices. However, if the bank is unable to sufficiently address its financial problems, the Fed may take more drastic action and take over the bank, which was the case for SVB.
When the Fed takes over a bank, it assumes control of the bank’s operations and assets. It may also appoint new management to run the bank (3/10/23 First Citizens Bank was asked to take over SVB by the Fed), or it may sell the bank’s assets to another financial institution. The goal of the takeover is to stabilize the bank and minimize any potential risks to the broader financial system.
It is worth noting that bank takeovers by the Fed are relatively rare occurrences and are typically reserved for cases in which a bank’s failure could have significant negative consequences for the broader financial system.
When a bank that has been taken over by the Federal Reserve (Fed) is then sold, it means that the Fed has deemed the bank to be stable enough to be sold to another financial institution or investor. Which in the case of SVB it has now been sold to First Citizen’s Bank on 3/27/23.
The Fed may sell the bank’s assets and liabilities to another financial institution through a bidding process, or it may sell the bank to a private equity firm or other investors. The sale is typically made with the goal of maximizing the value of the bank’s assets and minimizing any losses to the government and taxpayers.
The sale of a bank that has been taken over by the Fed may be a sign that the bank’s financial condition has improved and that it is no longer deemed a risk to the broader financial system. It may also be a sign that the government is no longer interested in owning or operating a bank, and that it is looking to exit its ownership position.
It is worth noting that the sale of a bank that has been taken over by the Fed does not necessarily guarantee its long-term success. The new owners will need to continue to manage the bank’s operations effectively and maintain its financial stability to ensure its continued success.
If a bank fails,
it may be a cause for concern for other financial institutions, but it depends on the specific circumstances surrounding the failure.
When a bank fails, it can cause a ripple effect throughout the financial system, as other banks and financial institutions may have exposure to the failed bank through loans, investments, or other financial transactions. This can create a domino effect, potentially leading to a broader financial crisis if multiple banks fail.
However, not all bank failures are created equal, and the impact on other financial institutions will depend on the size and significance of the failed bank, as well as the strength and stability of the broader financial system.
If the failed bank is relatively small and its failure is contained, it may not have a significant impact on other financial institutions. On the other hand, if the failed bank is large and its failure is systemic, it could lead to a broader financial crisis.
In any case, regulators and other financial institutions closely monitor the health of banks and the broader financial system to identify potential risks and take action to prevent or mitigate any negative consequences. Therefore, while a bank failure may be a cause for concern, it does not necessarily mean that other financial institutions are at risk.
The good news is, the Fed took swift action, stabilized the problem, and sought out a solution with the new bank. What this means for the depositors at other financial institutions is that there is no need to panic. The lesson learned from this failure is that anyone that deals with a bank should make sure to know how FDIC insurance affects your accounts and if you are protected or not.