What Is a Bank Failure? Definition, Causes, Results, and Examples (2024)

What Is a Bank Failure?

A bank failure is the closing of a bank by a federal or state regulator when the bank can't meet its obligations to depositors, borrowers, and others. The federal government has the power to close national banks and banking commissioners have the power to close state-chartered banks.

When a bank fails, the Federal Deposit Insurance Corporation (FDIC) covers the insured portion of a depositor's balance. At credit unions, the National Credit Union Administration (NCUA) insures depositors' money up to $250,000 each.

Key Takeaways

  • Bank failures occur when a bank cannot meet its obligations to creditors and depositors.
  • The FDIC protects bank customers, while the NCUA protects credit union customers, up to $250,000 per customer.
  • In some cases, the FDIC may fully reimburse for lost deposits of a failed bank without using federal or state tax revenues.
  • Bank failures are often difficult to predict. A few examples of bank failures include Washington Mutual and Silicon Valley Bank.

Understanding Bank Failures

A bank fails when it can’t meet its financial obligations to creditors and depositors. This could occur because the bank has become insolvent or no longer has enough liquid assets to fulfill its payment obligations.

The most common cause of bank failure is when the value of the bank’s assets falls below the market value of the bank’s liabilities, which are the bank's obligations to creditors and depositors. This might happen because the bank loses too much on its investments. It’s not always possible to predict when a bank will fail.

What Happens When a Bank Fails?

When a bank fails, it may try to borrow money from other solvent banks to pay its depositors. If the failing bank cannot pay its depositors, a bank panicmight ensue, causing depositors to withdraw their money from the bank (known as a bank run). This can make the situation worse for the failing bank by shrinking its liquid assets. When a bank's assets decrease, it has less money to lend to borrowers.

Since the creation of the FDIC, the U.S. government has insured bank deposits up to $250,000 per depositor per bank. When a bank fails, the FDIC takes control and will either sell the failed bank to a more solvent bank or take over the operation of the bank.

In many cases, depositors who have money in the failed bank will experience no change in their experience of using the bank. They’ll still have access to their money and should be able to use their debit cards and checks like normal.

In the event that a failed bank is sold to another bank, account holders automatically become customers of that bank and may receive new checks and debit cards.

Examples of Bank Failures

During the 2008 financial crisis, the biggest bank failure in U.S. history occurred with the closure of Washington Mutual (WaMu), which had $307 billion in assets. Washington Mutual struggled for several reasons, including a poor housing market and a run on deposits. JP Morgan Chase eventually bought WaMu for $1.9 billion. JP Morgan Chase took on another failed bank in May 2023 when the FDIC sold it First Republic Bank.

The second-largest bank failure in the U.S. was the closure of Silicon Valley Bank in 2023 after a bank run in which customers had withdrawn $42 billion within 48 hours (the bank had $209 billion in assets in December 2022).

Bank failures were common leading up to and during the Great Depression when thousands of banks failed. By the time the FDIC was created in 1933, American depositors had lost a substantial amount of money due to bank failures. Without federal deposit insurance protecting these deposits, they had no way of getting their money back.

Protections Against Bank Failures

The Federal Reserve now usually requires banks to keep a certain amount of cash reserves on hand to try to reduce the risk of failure. The reserve amount is a portion of the deposits it holds. Typically a bank must hold over 10% of its liabilities in cash reserves, but this requirement was suspended in 2020 amid the COVID-19 pandemic and was not reinstated for 2024.

The FDIC may sometimes provide reimbursement beyond its coverage limits. For example, it used funds from the Deposit Insurance Fund to fully reimburse depositors when Silicon Valley Bank failed in 2023. The money in the fund is furnished by quarterly fees charged to banks, not from tax revenue.

To better protect yourself against losing money if a bank fails, consider keeping only up to the FDIC- or NCUA-insured limit, or $250,000, in one bank or credit union. If you need to deposit more funds, you can open another account at a different bank for the same FDIC protection.

Financial institutions called bad banks can also help protect failing banks. Bad banks will buy the illiquid assets and bad loans from the failing entity.

What Happens During a Bank Failure?

When a bank fails, the FDIC is required to use the least costly solution to resolve the failure. It will often sell the bank's assets to another bank. The FDIC will reimburse depositors for up to $250,000 per depositor, per institution, and in some cases, it may fully reimburse lost funds.

What Was the Biggest Bank Failure?

The biggest U.S. bank failure was the collapse of Washington Mutual (WaMu) in 2008. At the time, it had about $307 billion in assets. That bank failure was caused by several factors, including a poor housing market and a run on deposits in which customers withdrew $16.7 billion within two weeks.

When Was the Last Bank Failure?

In 2023, there were five bank failures: Citizens Bank in November, Heartland Tri-State Bank in July, First Republic Bank in May, Signature Bank in March, and Silicon Valley Bank in March 2023. To find the last bank failure, check the FDIC's Failed Bank List, which includes banks that have failed since October 2000.

The Bottom Line

While bank failures are no longer as common as they were during the years leading up to and into the Great Depression, they can still occur. Even as banks have regulations for how much cash reserves they must have on hand and with FDIC and NCUA insurance protecting an amount of the deposits, bank failures still happen. Any number of factors, from a sudden run on deposits to changing economic conditions, can trigger a bank failure. If you're worried about a bank failure, you can work with a financial advisor to learn how to protect your funds.

What Is a Bank Failure? Definition, Causes, Results, and Examples (2024)

FAQs

What Is a Bank Failure? Definition, Causes, Results, and Examples? ›

A bank fails when it can't meet its financial obligations to creditors and depositors. This could occur because the bank has become insolvent or no longer has enough liquid assets to fulfill its payment obligations.

What are two ways a bank can fail? ›

Banks can fail for many reasons, but generally they fall into a few broad categories: a run on deposits (which leaves the bank without the cash to pay everyone who wants to withdraw their money); too many bad loans or assets that fall precipitously in value (both of which erode the bank's capital reserves); or a ...

What are the three biggest bank failures? ›

List of largest bank failures in the United States
BankCityAssets at time of failure
Inflation-adjusted (2023)
Washington MutualSeattle$434 billion
First Republic BankSan Francisco$229 billion
Silicon Valley BankSanta Clara$209 billion
77 more rows

How did bank runs lead to bank failures? ›

Why Is a Bank Run Bad? Bank runs can bring down banks and cause a more systemic financial crisis. A bank usually only has a limited amount of cash on hand that is not the same as its overall deposits. So, if too many customers demand their money, the bank simply won't have enough to return to their depositors.

What are the determinants of bank failure? ›

Among bank fundamentals, liquidity, profitability and capitalisation proved to be prominent bank related determinants of bank failures in their respective order.

What is a bank failure? ›

A bank failure is the closing of a bank by a federal or state banking regulatory agency. Generally, a bank is closed when it is unable to meet its obligations to depositors and others.

What were some major effects of these bank failures? ›

That is the monetary explanation for the Great Depression. Bank failures, bank runs caused a contraction of the money supply, causes a decline in spending, investing, and GDP.

What banks are failing in 2024? ›

Republic First Bank's demise on April 26 was the first failure of 2024. Its collapse renewed fears that last year's financial instability is still lingering. Republic First Bank was shuttered last week by its state regulator and taken over by the Federal Deposit Insurance Corp.

Why are US banks failing? ›

The current regional banking crisis was caused by a number of factors, including rapidly rising interest rates (resulting in large declines in the market value of Treasury bonds and government-backed mortgage securities held by regional banks), high levels of uninsured deposits, regulatory rollbacks, and lax ...

Why do most banks fail? ›

A run on deposits (leaving the bank without the cash to pay customer withdrawals). Too many bad loans/assets that fall sharply in value (eroding the bank's capital reserves). A mismatch between what the bank can earn on its assets (primarily loans) and what it has to pay on its liabilities (primarily deposits).

Can banks seize your money if the economy fails? ›

Banking regulation has changed over the last 100 years to provide more protection to consumers. You can keep money in a bank account during a recession and it will be safe through FDIC and NCUA deposit insurance. Up to $250,000 is secure in individual bank accounts and $500,000 is safe in joint bank accounts.

What happens if everyone withdraws their money? ›

However, if many depositors withdraw all at once, the bank itself (as opposed to individual investors) may run short of liquidity, and depositors will rush to withdraw their money, forcing the bank to liquidate many of its assets at a loss, and eventually to fail.

Should you pull your money out of the bank? ›

In short, if you have less than $250,000 in your account at an FDIC-insured US bank, then you almost certainly have nothing to worry about. Each deposit account owner will be insured up to $250,000 — so, for example, if you have a joint account with your spouse, your money will be insured up to $500,000.

What happens to your money if a bank closes? ›

If your bank closes, you should receive notification of what will happen to your money from the FDIC or NCUA, the acquiring bank or both. You'll automatically have an account at the new bank, or the FDIC or NCUA will issue you a payment returning your funds.

How do you predict bank failure? ›

As a result, the CAMEL rating system is adopted as a predictor of bank failure. It is a five-part rating system to evaluate banks' overall condition based on their Capital adequacy, Asset quality, Management expertise, Earning strength and Liquidity.

Which bank risk is most likely to cause a bank to fail? ›

Credit risk is the biggest risk for banks. It occurs when borrowers or counterparties fail to meet contractual obligations.

What are the 3 recent bank failures? ›

Earlier last year Silicon Valley Bank failed March 10, 2023, and then Signature Bank failed two days later, ending the unusual streak of more than 800 days without a bank failure. Before Citizens Bank failed in November 2023, Heartland Tri-State Bank failed July 28, 2023 and First Republic Bank failed May 1, 2023.

How common are bank failures? ›

Bank failures happen more often than you might think—there have been 569 in the U.S. since January 1, 2000. That's an average of about 25 per year.

What are the two main ways in which the government can keep one bank failure from leading to a bank panic? ›

The two main ways in which the government can prevent a bank failure from leading to a bank panic are by the central bank acting as a lender of last resort and the government insuring deposits. The central bank provides liquidity to banks in financial stress, and deposit insurance safeguards depositor interests.

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