Are Widespread Bank Closures on the Horizon?

Rising interest rates, a plummeting stock market, and two recent bank closures have Americans on edge now, but do these current events mean certain doom? The answer, thankfully, is no. So let’s look deeper into why this has happened and what we can do to push through.

Rising interest rates

Post-COVID rates have indeed been on the rise. At the height of the pandemic, the Fed lowered rates to near-zero to spur the slowing economy. Getting dollars out in circulation allowed businesses and individuals to afford to borrow money. It also helped to maintain or create jobs and allow investors the funds to do what they do best. With such low rates, economic growth took off, and a total collapse mid-pandemic was prevented.

Now that we are all seeing some light at the end of the COVID tunnel, the Fed has to slow down the growth and make it less affordable to borrow money. Whereas lower interest rates create high demand, high interest rates cool demand and help fight inflation. The Fed is trying to gradually lower the prices of goods and encourage disinflation while simultaneously avoiding a recession. The hope is that once things have leveled out, so will interest rates, gradually decreasing to a more reasonable and favorable rate for consumers and businesses. While future rate hikes remain uncertain, one thing is still true; savings rates continue to flourish, encouraging long-term savings products like certificates, money markets, and IRAs. In short, now is the time to take advantage of savings rates that are higher than they have been in well over a decade.

Stock market woes

The stock market has been fluctuating since COVID. Peaking in February 2020 ahead of lockdowns, the years and months following have been unpredictable at best. The impact of COVID in virtually every industry negatively impacted stock prices, which leads us to today’s market. Still volatile from the ever-evolving effects of inflation and rising costs, investors may be reluctant to take on the risk of holding stock. Our market is rooted in investor confidence. Uncertainty, regardless of the validity, creates a ripple effect. That’s what we are seeing now as a result of the three recent bank closures we are about to discuss.

Bank closures

Yes, it’s true. March of 2023 has seen the closure of three banks. This unusual set of circumstances sparked consumer concerns, but those concerns are largely without merit. Just because these banks failed does not indicate a widespread failure is looming on the horizon. Let’s look at each bank and why it failed.

Signature Bank and Silvergate focused primarily on institutions rather than consumers. Additionally, both banks were widely used to transfer cryptocurrencies into dollars in real-time. Due to the lack of regulations afforded to traditional currencies, crypto has long been considered a volatile asset. As a result, these banks entered into a relationship with a higher risk than conventional banks, and in this case, the risk was too great for them to remain in business.

The third bank to collapse, and the one you are probably hearing about most often, was Silicon Valley Bank. Their sudden failure resulted from insufficient cash to pay out when depositors wanted to pull out. Banks and credit unions use incoming deposits to lend, operate, and invest. In Silicon Valley Bank’s case, the invested surplus lost tremendous value as the interest rates increased in 2022 and 2023. As they sold off securities, they could not recoup what they lost, their stock dropped, and depositors – high dollar depositors, at that – decided to pull out their money. The FDIC took notice and stepped in to protect the remaining depositors from losing their funds.

The three institutions failed because of internal mistakes rather than a widespread issue that would impact other institutions.

As a note to our members at InFirst, we are financially sound. You can have faith that your account is safe with us. Since 1935, we have kept your best interests in mind and will continue to do so despite imperfect economic conditions. Your shares are insured by NCUA up to $250,000.

Do you have questions about the items discussed in this post? I want to hear from you. Leave a comment below or email me.

Krista Kyte is a personal finance blogger and personal banker with over 20 years of experience in the financial industry. Krista is passionate about helping our members understand their financial situations. She writes tips that help consumers reach and maintain financial security and start living the life they’ve always wanted.