What do the recent bank failures mean for you?

The upheaval and pundit hearkening back to the 2008 financial crisis are enough to make anyone panic, but should you? The short answer is probably not, and here’s why.|

The past week has seen three U.S. bank failures, including the second- and third-largest on record. The upheaval and pundit hearkening back to the 2008 financial crisis are enough to make anyone panic, but should you?

The short answer is probably not, and here’s why.

On Friday, the federal bank stepped in to take over Silicon Valley Bank, a major Santa Clara-based commercial bank with Sonoma and Napa county locations.

Two days earlier, the financial institution announced an almost $2 billion loss as part of a desperate sale to raise capital in response to tech company clients withdrawing funds as economic conditions soured in the last year for the until-recently booming industry. That move by the bank precipitated an all-out bank run in the course of 48 hours.

There are many factors at play in this meltdown.

(New York Times: Inside the collapse of Silicon Valley Bank)

But, one important factor is that many of the bank’s clients -- wealthy venture capital firms, tech and startup companies and even a good chunk of California wine businesses -- kept huge sums in their accounts.

The Federal Deposit Insurance Corporation or FDIC, which was created out of the Great Depression in an effort to restore faith in the American banking system, insures customer deposits, but only up to a certain amount. That figure was set at $250,000 after the 2010 Wall Street reforms.

Ninety percent of Silicon Valley Bank’s deposits exceeded that cap, a risky move by the bank and its account holders. With a lot to lose, big clients started withdrawing en masse at signs of trouble, leading to a run that sealed the bank’s fate as it couldn’t keep up with the hemorrhaging.

To stem the bleeding, the government took the unusual step Sunday to guarantee all the depositors anyway.

There’s a broader lesson there, but it’s also a reminder that those of us with less than a quarter-million sitting around are generally protected.

“People should not panic, especially if you don't have more than $250,000 in cash at your financial institution in one account,” said Robert Eyler, a professor of Economics at Sonoma State University. “There's no reason to lose your mind as a result of this. There are no data, no general tidings, that suggest that we're on the precipice of a full-blown banking system collapse.”

The majority of depositors at the truly big banks serving the most people -- your Wells Fargo, Chase and Bank of America -- don’t have have that kind of cash in hand, which limits widespread risk.

Silicon Valley Bank’s collapse did reverberate through the regional and mid-size banking industry with stocks plunging Friday. Signature Bank, with its high deposits and heavy cryptocurrency exposure, folded in short order.

First Republic Bank out of San Francisco, with offices in Sonoma and Napa counties, led a sharp decline in bank shares Monday.

These smaller though still considerable financial institutions tend to be less diversified with less cash on hand in case of emergency, but they’re not one and the same when it comes to risk exposure. First Republic said Sunday it received an infusion from the Federal Reserve and JP Morgan Chase and is in good shape.

Indeed, on Tuesday, First Republic and other bank shares bounced back considerably.

Eyler said that First Republic and other similarly situated customers should be more aware over the next week or two -- check emails and the website for updates from the company and track the news.

If you don’t feel safe, you can withdraw or move some or all assets to another bank, “but the more and more people do that, the more and more they can exacerbate risk where it really isn't in the first place,” he told me.

It’s a delicate dance that can turn into a self-fulfilling prophecy.

“Historically, when bank runs happen, single banks have depositors leaving them because of a lack of confidence in that bank's ability to stay in business. The more and more banks that get sucked into that circle, regardless of their own financial stability, that's called a bank panic,” Eyler said.

“That's where it starts to affect everybody, and then that outflow of deposits starts to affect a bunch of banks and credit unions that had no financial trouble whatsoever.”

Ultimately, in an effort to prevent such an outcome, the government stepped in, offering banks low-cost loans and insuring all deposits, regardless of sum, at Silicon Valley Bank and Signature Bank.

Unlike the 2008 financial crisis, the banking industry rather than taxpayers are covering the costs, since the government is drawing on the insurance fund banks pay into, and while account holders will be protected, bank managers and investors won’t be.

In the coming months, there will be questions about whether these exceptions to insure above the legal cap will lead depositors to assume they’ll be covered no matter what. There will be discussions about whether the 2018 roll back of Wall Street reforms for mid-sized banks--which Silicon Valley Bank lobbied heavily for -- allowed them to grow too large without proper oversight. There will be debates about the role the federal government’s rapid increase of interest rates played in any destabilization.

But, there are also some immediate straightforward takeaways for us little guys.

“Should you be more aware of your financial institution’s operations and solvency and think about how much money you have on deposit at your financial institution?... The answer is yeah,” Eyler told me.

Heavy cash users or holders, in particular, who might be sitting on inheritance or a home sale or who are running a business, might consider spreading that money around between accounts and banks.

“There's some really strong lessons to be learned in terms of financial literacy around this for your household or business plucked at random. That's one thing I hope comes out of this -- we all just become a little bit more aware of the way that we hold cash and the importance of deposits, especially to the banking industry.”

“In Your Corner” is a column that puts watchdog reporting to work for the community. If you have a concern, a tip, or a hunch, you can reach “In Your Corner” Columnist Marisa Endicott at 707-521-5470 or marisa.endicott@pressdemocrat.com. On Twitter @InYourCornerTPD and Facebook @InYourCornerTPD.

Marisa Endicott

“In Your Corner” Columnist, The Press Democrat

Born and raised in Northern California, I'm dedicated to getting to know all its facets and helping track down the answers to tough questions. I want to use my experience as a journalist and an investigator to shine a light on local systems, policies and practices so residents have the information they need to advocate for the changes they want to see. I’m passionate about centering the many voices in the communities I cover, and I want readers to guide my work.

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