For the first time in more than two years, federal regulators in recent days stepped in to take over temporary operations of two troubled banks.
While the Federal Reserve, Treasury Department and Federal Deposit Insurance Corp. acted quickly to assure that no depositors would suffer losses, including those with more than $250,000 held at the banks, the actions involving Silicon Valley Bank and Signature Bank have raised anxiety.
Other signs also are worrisome, including lofty inflation, higher interest rates and some indications of slowing economic growth. Here are answers to questions you might have about banks and deposit insurance.
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Are my deposits in the failed banks safe?
Yes, as standard deposit insurance of up to $250,000 applies. There were reports of substantial amounts of uninsured deposits, especially at Silicon Valley Bank, so federal regulators also announced an exception under which all depositors are covered. Nor will losses associated with the banks fall to taxpayers in these cases but will come from a special assessment, if needed, levied on the banking industry. Normally, depositors are protected only up to $250,000. Not every bank offers deposit insurance, but the vast majority do.
Can I receive protection above $250,000?
Yes. The dollar amount of coverage can expand if you hold accounts in different ownership categories, such as jointly held accounts, retirement accounts and deposits in employee benefit plans as well as individual accounts. Consumers can receive even more protection by splitting their deposits among different banks. Of note, deposit insurance includes past and accruing interest along with principal amounts.
And if all that's not enough, you can transfer some of your money to credit unions, which also receive deposit insurance of $250,000 or more through the National Credit Union Administration or ncua.gov.
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Do I need I apply for protection of my deposits?
No, it’s automatic when you open an account at an insured institution, though it’s important to verify that a bank or credit union is covered by FDIC or NCUA insurance. The vast majority are. Look for signs at the bank or emblems on documents or websites that deposits are insured.
Are all of a bank’s products insured?
No. Covered accounts and products include checking and savings accounts, money market deposit accounts, certificates of deposit and some prepaid cards. Instruments and assets that aren’t insured — even if sold by bank employees — include life insurance policies, annuities, municipal bonds and the contents of safe deposit boxes. The FDIC, at fdic.gov, has an electronic deposit insurance estimator to help you assess your coverage levels.
Are bank failures common?
No, and they have become increasingly less frequent over the years. Prior to the closures of Silicon Valley Bank and Signature Bank last week, the previous closing was in October 2020 of Kansas' Almena State Bank. Even during the financial crisis of 2007-2010, there were fewer closures compared to some prior economic downturns. The recent peak was 157 failures in 2010.
Then again, there also are fewer banks around than in past decades, owing largely to industry consolidation.
What is a bank failure, and what usually happens?
Essentially, banks fail when they can't meet their obligations to depositors and others. Customer runs on deposits were alarmingly frequent early in the Great Depression, which led to the more-strict regulations that we have today. When a bank can't pay depositors, regulators step in.
In the case of Silicon Valley Bank, for example, California regulators took action and appointed the FDIC to act as receiver, overseeing the orderly resolution of the bank's affairs. Often, the FDIC might need to sell assets to settle a bank's debts including demands for deposits. Sometimes, the operations are sold largely intact to another financial institution. Usually, the former management team is replaced, as with Silicon Valley Bank, and the holdings of shareholders in the failed institution often are wiped out.
Are banks in good shape today?
Generally, yes. In addition to no prior closures for more than two years, the vast majority of banks are profitable. All told, the industry generated $68.4 billion in net income over the three months ended Dec. 31, the FDIC reported. While that was down 4.6% over the same stretch in 2021, it’s still an impressive number. Overall, 94.3% of the roughly 4,700 FDIC-insured banks were profitable in the latest quarter.
"Key banking-industry metrics remain favorable at this time," said Martin Gruenberg, chairman of the FDIC, in a recent prepared statement. However, he also noted various risks that could threaten backs including lofty inflation, rising interest rates and the potential for a slowing economy.
Then again, Silicon Valley Bank, which earned a $1.5 billion profit in 2022, also was historically profitable until funding stresses rendered it unable to meet its obligations to depositors and others. Things can change quickly.
Isn't there a deposit fund to help out with failures?
Yes, the FDIC's deposit insurance fund currently has enough money to cover 1.27% of deposits. While that might not sound high, the fund has stabilized after running at a deficit in 2010 and 2009.
Will I get notified if my bank is ready to fail?
No, as any such announcement could spark a run on deposits and make a bank's financial stresses worse. Nor do FDIC officials disclose which banks are on its troubled watch list, for the same reason. Bank regulators often shutter troubled banks on Fridays and use the weekend to get things in order before normal business hours resume the following Monday. That's what happened with Silicon Valley Bank and Signature Bank.
While it won't name names, the FDIC said it was watching 39 banks that it considered problems at the end of 2022, down from a peak of 884 in 2010.
Who regulates banks anyway?
Various state and federal agencies assume different oversight responsibilities, including the Office of the Comptroller of the Currency for large national banks and the Arizona Department of Insurance and Financial Institutions (difi.az.gov) for state chartered banks. The state department also takes complaints from consumers directed against banks, insurance companies and others.
In addition, the FDIC and the Federal Reserve oversee banks in some ways, while the National Credit Union Administration and other agencies regulate credit unions.
Reach the writer at russ.wiles@arizonarepublic.com.
