{"id":1268,"date":"2023-06-05T07:58:57","date_gmt":"2023-06-05T07:58:57","guid":{"rendered":"https:\/\/www.innov8fs.co.za\/blog\/?p=1268"},"modified":"2026-03-18T11:46:26","modified_gmt":"2026-03-18T11:46:26","slug":"banking-crisis-2023-explained-what-investors-need-to-know","status":"publish","type":"post","link":"https:\/\/www.innov8fs.co.za\/blog\/2023\/06\/05\/banking-crisis-2023-explained-what-investors-need-to-know\/","title":{"rendered":"Banking Crisis 2023 Explained: What Investors Need to Know"},"content":{"rendered":"
\n

\"\"<\/p>\n

The health of the banking industry is top of mind for investors. Why have banks struggled so much in 2023, and what’s next?<\/p>\n<\/div>\n

\n
\n

Banks have seen their authority challenged in 2023 as collapses triggered concerns about a crisis in the system.<\/strong><\/p>\n

Several established institutions with significant clients have crashed, throwing investors for a loop and raising questions about whether more banks will fail in the future \u2014 and what market participants should do to protect themselves.<\/p>\n

Here the Investing News Network presents a timeline of the banking crisis and a look at what may be next.<\/p>\n

<\/p>\n

What is the banking crisis?<\/h3>\n

This year’s bank collapses have been some of the biggest in US history, and there are many factors behind them.<\/p>\n

Higher interest rates and poor management decisions are part of what has caused these failures, which are reminiscent of the down days seen in 2008. Sentiment has also played a role \u2014 fear is a powerful agent in the marketplace, and it can wrap around investors very quickly, leading to sudden swings in momentum.<\/p>\n

It’s perhaps unsurprising then that institutions such as the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve Board quickly\u00a0stepped in to prevent further damage\u00a0after the banking issues began.<\/p>\n

\u201cPolicymakers also noted that actions taken by the Fed and other government agencies to mitigate possible contagion and secure the US financial system had successfully quelled immediate fears and calmed conditions in the banking sector,\u201d\u00a0CNN states.<\/p>\n<\/div>\n

<\/p>\n

Which banks have collapsed in 2023?<\/h3>\n

The bank that kickstarted the sector’s problems was the aptly named Silicon Valley Bank (SVB), which primarily serviced the tech industry \u2014 its spectacular collapse will be talked about for years to come.<\/p>\n

Although it was one of the 20 biggest commercial banks in the US, SVB was relatively unknown before its failure suddenly catapulted it into the spotlight. At the\u00a0crux of its problems\u00a0was that the bank invested short-term deposits in long-maturity debt. After selling securities at a loss and then attempting to raise US$2.25 billion, investors got worried.<\/p>\n

\u201cSVB\u2019s condition deteriorated so quickly that it couldn\u2019t last just five more hours,\u201d Better Markets\u00a0CEO Dennis M. Kelleher said\u00a0soon after SVB took a turn for the worse. \u201cThat\u2019s because its depositors were withdrawing their money so fast that the bank was insolvent, and an intraday closure was unavoidable due to a classic bank run.\u201d<\/p>\n

The assets of the bank were seized by the FDIC in early March.<\/p>\n

After the spectacular collapse of SVB, the next bank run did not take long to arrive; in fact, it happened only a couple of days later, when New York-based Signature Bank collapsed in the third largest bank crash in US history.\u00a0According to the FDIC, Signature Bank\u2019s woes can be traced back to the pursuit of \u201crapid, unrestrained growth\u201d by a \u201cpoor management\u201d team.<\/p>\n

Signature Bank shut down in mid-March, two days after the SVB closure. The bank saw deposit outflows of US$42 billion in one day. Some of its assets were eventually\u00a0acquired by Flagstar Bank, a subsidiary of New York Community Bancorp (NYSE:NYCB).<\/p>\n

Then came First Republic Bank. The San Francisco-based bank began crumbling after it\u00a0reported a drop of over US$100 billion\u00a0in deposits for the first quarter. The news sent its shares on a dramatic fall.<\/p>\n

Fears from First Republic customers\u00a0began bubbling quickly, with clients looking to bigger banks for peace of mind. The crash was swift, and before anyone could say “bank run,” the assets of First Republic Bank were headed for sale.<\/p>\n

“With the closure of several banks in March, we experienced unprecedented deposit outflows,” Neal Holland, First Republic’s former finance chief, said before the collapse.<\/p>\n

Following SVB’s demise, US President\u00a0Joe Biden said\u00a0Americans should feel confident in the overall health of the country’s banking system. “Your deposits will be there when you need them,\u201d he commented.<\/p>\n

\u201cSmall businesses across the country that deposit accounts at these banks can breathe easier knowing they’ll be able to pay their workers and pay their bills, and their hard-working employees can breathe easier as well.”<\/p>\n

As mentioned, the US government has taken various steps to mitigate customers’ concerns.<\/p>\n<\/div>\n

<\/p>\n

How is the banking crisis affecting the US economy?<\/h3>\n

The first US Federal Reserve meeting after the banking crisis began created a gloomy economic outlook. The central bank\u00a0said it’s likely\u00a0the issues will push the US into a \u201cmild recession\u201d in the second half of the year.<\/p>\n

The Fed has also played a critical role in the response to the banking crisis.<\/p>\n

Michael S. Barr, the Federal Reserve Board’s vice chair for supervision,\u00a0authored a review\u00a0of the SVB collapse as a way to find out where the Fed’s response to the crisis could have been better. “Following Silicon Valley Bank’s failure, we must strengthen the Federal Reserve’s supervision and regulation based on what we have learned,” he said in the report.<\/p>\n

However, the Fed doesn’t believe the collapses are indicative of the overreaching health of the market \u2014 instead, it sees them as outliers of a \u201csound and resilient (system), with strong capital and liquidity.\u201d<\/p>\n

The review recommends that the Fed\u2019s supervision and regulation be increased, but ultimately points fingers at SVB\u2019s board of directors and its management’s inability to manage risks.<\/p>\n

\u201cWhile the proximate cause of SVB\u2019s failure was a liquidity run, the underlying issue was concern about its solvency,\u201d Barr said.<\/p>\n

One of the biggest winners from the recent banking crisis, in one way at least, is JPMorgan Chase (NYSE:JPM), which ended up acquiring First Republic in a US$10.6 billion deal that was managed by regulators.<\/p>\n

Jamie Dimon, CEO of JPMorgan, has\u00a0dismissed concerns\u00a0about the health of the banking market. \u201cOur government invited us and others to step up, and we did. This acquisition modestly benefits our company overall, it is accretive to shareholders, it helps further advance our wealth strategy, and it is complementary to our existing franchise,\u201d he said.<\/p>\n<\/div>\n

<\/p>\n

Are other banks in danger of failing?<\/h3>\n

While SVB, Signature Bank and First Republic were lesser-known names in the banking segment, their collapse one after the other has left many investors worrying about the health of larger banks.<\/p>\n

Are these concerns valid?\u00a0A study\u00a0found there are\u00a0nearly 200 banks at risk\u00a0of collapse right now. The study, which was published at the end of March, was prepared by researchers from the University of Southern California, Northwestern University’s Kellogg School of Management, the Columbia Business School Finance and Stanford University.<\/p>\n

“We show that a bank\u2019s survival depends on the market beliefs about the share of uninsured depositors who will withdraw money following a decline in the market value of bank assets,” the report’s abstract explains.<\/p>\n

The authors trace this risk back to the status of uninsured depositors, meaning bank clients with no insurance on their accounts \u2014 these clients are more likely to try to withdraw their funds in the event of turmoil.<\/p>\n

For the bank failures seen so far this year, a common trait is unrealized losses among institutions attempting to capitalize on long-term Treasury bond investments.<\/p>\n

\u201cWhen interest rates were near historical lows, the banks bought up on long-dated, seemingly low-risk Treasuries. But as rates rose, the value of those assets has fallen, leaving them sitting on unrealized losses,\u201d\u00a0CNN indicates. \u201cHigh rates significantly constrained tech companies, which undercut the value of tech stocks and made it difficult to raise funds.”<\/p>\n

As questions about the health of the entire banking segment continue, one thing is clear: the crises experienced in 2023 have created new considerations in the sector \u2014 at least in the eyes of regulators.<\/p>\n

\u201cThe combination of social media, a highly networked and concentrated depositor base, and technology may have fundamentally changed the speed of bank runs,\u201d Barr notes in his report on the impact of the SVB crash.<\/p>\n

In fact, Greg Becker, former CEO of SVB,\u00a0believes social media\u00a0is one of the reasons sentiment soured on the bank.<\/p>\n

The executive has pointed to the actions of the Fed as one of the factors affecting banks like SVB. \u201cThe messaging from the Federal Reserve was that interest rates would remain low and that the inflation that was starting to bubble up would only be \u2018transitory,\u2019\u201d he said as part of his testimony in a hearing in front of the US Senate Banking Committee.<\/p>\n<\/div>\n

<\/p>\n

What should investors do when banks collapse?<\/h3>\n

On top of sentiment concerns and worries about whether or not customers would be able to access their funds, the banking crisis also unsurprisingly caused a\u00a0downturn in bank stocks.<\/p>\n

Investors were quick to turn away from these names, showcasing their lack of confidence in the overall space.<\/p>\n

Even for those interested in approaching struggling names in hopes of seeing bank stocks improve, Nancy Tengler, chief investment officer at Laffer Tengler Investments, told Bloomberg there\u2019s no need to rush with this strategy.<\/p>\n

\u201cIt\u2019s not smart to chase some of these other bank stocks,\u201d she said. \u201cYou have to let the falling knife fall.\u201d<\/p>\n

Beyond that, do mounting concerns about the bank system mean investors should begin thinking radically when it comes to planning their finances? As per usual, it depends on the type of investor. While there are some out there who are ready to escape the current financial system, most investors will not go to such extremes.<\/p>\n

In an\u00a0advice column, Gregory Germain, professor of law at Syracuse University\u2019s College, writes:<\/p>\n

So what should you do in this uncertain banking environment? First, you should have no concerns about the safety of your deposits in any insured bank or credit union as long as your deposits are under the $250,000 per person FDIC or NCUA insurance limits. If your bank gets into trouble, the FDIC or NCUA will quickly pay you back for your insured deposits. As long as your deposits are insured, your money is safe.<\/p><\/blockquote>\n

However, retail banks and credit unions are paying very low rates of interest on your deposits. A smart customer can earn much higher rates of interest through equally safe insured internet banks, treasury bills, and government money market funds. Consumers should shop around for maximum safe rates, keeping minimum amounts in their local banks to cover current expenditures. Money can easily be transferred electronically from other accounts to your local bank within a couple of days as necessary. As consumers move their money to earn higher rates, banks will be forced to compete by raising the interest rates they offer to attract deposits.<\/p><\/blockquote>\n

Germain further notes that in general it’s not a good plan to keep over US$250,000 in the bank. While he acknowledges that this may be necessary for some businesses, he suggests spreading money among banks and other investments as a way to manage risk and incur higher rates of return.<\/p>\n<\/div>\n

<\/p>\n

Investor takeaway<\/h3>\n

The future is unpredictable, but in the economic marketplace, the role of banks is usually seen to be as solid as cement. But the reality, as shown recently by these bank runs, is that risk can be found in any corner of the market.<\/p>\n<\/div>\n<\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

The health of the banking industry is top of mind for investors. Why have banks struggled so much in 2023, and what’s next? Banks have…<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[4],"tags":[],"class_list":["post-1268","post","type-post","status-publish","format-standard","hentry","category-innov8ions"],"_links":{"self":[{"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/posts\/1268","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/comments?post=1268"}],"version-history":[{"count":1,"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/posts\/1268\/revisions"}],"predecessor-version":[{"id":1270,"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/posts\/1268\/revisions\/1270"}],"wp:attachment":[{"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/media?parent=1268"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/categories?post=1268"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/tags?post=1268"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}