The Collapses of Banks in the US: Contagion, Inflation, & Bank Runs

The Collapses of Banks in the US: Contagion, Inflation, & Bank Runs

The collapses of both Silicon Valley Bank and Signature Bank occurred in mid March, with depositors withdrawing huge amounts of money, and the fear of contagion continuing to spread rapidly throughout the U.S.

“When banks grow quickly, there are red flags everywhere. That’s because the management’s capacity and the bank’s compliance systems seldom grow at pace with the rest of the business,” said Dennis M. Kelleher, CEO of Better Markets.

The news about Silicon Valley Bank (located in Santa Clara, CA) became widely known to many Americans as the second largest bank failure in the United States– according to the Federal Deposit Insurance Corporation (or FDIC)–whose job is to sustain stability in our country’s financial system.

 One consequence leading to the closing of the bank was the “current turmoil in the financial system,” as said by Abha Bhattarai, economics correspondent for the Washington Post. Inflation– high prices, surging interest rates, and demand after the pandemic played a large role in the shutdown, causing investments the bank had made to become less valuable.

After the bank announced their capital raising (asking for additional funds or resources from external investors), people were frantic and took part in a bank run, drawing out all of their money at once. Since SVB provided financing for numerous startup and tech companies, the collapse affected many.  

President Biden addressed the nation on March 13, 2023, to try to calm worries of contagion–the idea that one bank’s financial issues can quickly travel to many others, or even the entire financial system. “Americans can rest assured that our banking system is safe. Your deposits are safe,” President Biden said. “Let me also assure you: we will not stop at this. We will do whatever is needed.”

The collapse of Silicon Valley Bank led to another: Signature Bank (located in New York, NY). “Many of Signature’s customers panicked and began calling the bank, worried that their own deposits could be at risk,” Vivian Giang from the New York Times reported. “Two days after the FDIC took control of Silicon Valley Bank, New York regulators abruptly closed Signature Bank.”

There are contrasting opinions about if these collapses could lead to more in the future. 

“If interest rates continue to rise, and the Federal Reserve has indicated that they will, the value of the investment portfolios of banks across the U.S. will continue to go down,” said William Chittenden from The Conversation. “The good news is that most banks currently have enough capital to absorb these losses.”