Make Ends Meet: What you should know on bank failures

LOUISVILLE, Ky. (WAVE) - The world of banking can be confusing and complicated, so when something goes wrong, panic can spread like wildfire.

With the sudden collapse of Silicon Valley Bank in March, Signature Bank customers got spooked enough to quickly withdraw $10 billion in deposits, leading to the third-largest bank failure in U.S. history.

Financial planner and investment advisor Marcus Warren of Warren Wealth Management and Tax Planning said there is a lot to learn from what’s happening now.

“Most people don’t understand how banks work.” Warren said.

Most understand basic checking and savings and the concept of doing our best to keep what goes in balanced with what we take out.

However, when the news of a bank failing spreads across the country or the world, panic can easily spread even if it wasn’t their own bank.

“In the last 10 years, 73 banks have failed,” proclaimed Warren.

Bank failures aren’t that uncommon; a few typically happen each year.

“A lot of times it’s done under the radar because you’ll see that you were banking at First Trust and now it’s Called First Republic,” Warren said. “That First Trust could have been on the brink. The Fed came in and looked at those books, you’re insolvent, we’re gonna facilitate another bank to take over and now that bank is called something else.”

Warren said if you’re wondering if the Federal Reserve’s interest rate hikes caused the latest bank failures you can rest assure they are not to blame.

“They did not,” Warren said when it came to pointing the finger at the Federal Reserve. “People are trying to find someone to blame and of course the Fed, they do blame them for raising interest rates so high.”

Interest rates doomed Silicon Valley Bank after it took a lot of the billions it made on loans and investments and then put it into what is usually a pretty safe bet: U.S. government bonds

“U.S. Treasury bonds and interest rates have an inverse relationship so as interest rates go up the value of those bonds go down,” Warren said.

The rates climbed and Silicon Valley Banks bonds tumbled.

“A tweet went out with one of the venture capitalist firms that said hey there’s some issues going on at the bank,” Warren said. “We’re going to pull our deposits. You should do the same. There’s not a financial institution or bank right now that if everybody came to get their deposits all at the same time that wouldn’t be in danger of failing because they don’t have the money there sitting in the vault ready to go. They have it all tied up in investments and loans.”

Even with the bank failures we have seen this year and in the past that doesn’t mean your money isn’t safe even if the bank fails.

“All U.S. banks have what’s called FDIC insurance, Federal Deposit Insurance Corp.,” Warren said. “They insure up to $250,000 per depositor.”

Your Credit Union is insured by the National Credit Union Administration making them just as safe as banks.

“You don’t have to grab a shovel and bury it in a hole in the backyard and take your money and shove it in a mattress,” Warren said. “You can keep it in the bank.”

The FDIC insures depositors up to $250,000. If a company or a depositor has more than $250 thousand dollars in the bank, the government does its best to facilitate the sale of that bank so that everyone is made whole.

The loans and investments made by the bank with our money are what make the community function on a daily basis. It’s a delicate dance, but most of the time it works.

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