Recent events in the banking industry have affected the overall population’s confidence in the U.S. banking system – but did you know that it is common for at least a few banks to fail each year?
Not all are as widely publicized as the most recent failure of Silicon Valley Bank (SVB) or the bank failures during the financial crisis of 2008, when more than 400 banks failed between 2008 and 2011. For better or worse, these high-profile failures have underscored the importance of effective governance, oversight, and assurance in the financial sector.
To restore any eroded confidence in the banking system following the recent headlines about bank failures, it’s important to understand what can lead to a bank’s failure and what steps to consider in order to minimize the impacts to depositors.
What are the factors and warning signs?
While it is impossible to predict with 100% certainty if a bank will fail, there are signs and indicators that a bank might be in trouble. Education is key, and a first step to take is to understand how we got here – what caused the current bank failure situation that started with Silicon Valley Bank (SVB), and the fall-out from it.
Financial risk mismanagement arguably played a significant role. For example, some of the banks impacted by the fallout from the SVB situation were warned of their exposure to a rise in interest rates by internal systems, but they chose to ignore the warnings. It could, of course, also have been due to economic factors. In fact, the most recent Regulatory & Risk Management Indicator survey, compiled by experts at Wolters Kluwer Compliance Solutions at the end of last year, showed that 73% of respondents were highly concerned about interest rate increases.
How do you know if a bank might be in trouble?
Experts say one of the first signs might come from financial news or social media. Staying informed will help you assess a bank’s overall health.
Look for news about a delay in a bank’s financial reports, about talks a bank might be acquired or sold, about lay-offs of non-essential employees, or of branches being closed.
Other warning signs concern a bank’s customers: are depositors withdrawing their money? Also, is the bank making it too easy to open new accounts? That could be a sign that the bank is desperate for cash.