Failed Banks and Their Impact on Customers (2024)

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• Many major bank failures in history have occurred during times of economic decline.
• The U.S. government has created laws to protect banking customers better when banks fail.
• In 2024, only one bank failure has occurred so far.

When a bank can't manage obligations, a federal or state agency will shut it down. Bank failures aren't as common as they were during the Great Depression, and consumers also have more protection in the rare event that one occurs.

Major bank failures in history

To help you get a better understanding of why bank failures happen, we'll briefly go over some of the largest bank failures in U.S. history. We'll also cover laws implemented after these banking crises to better protect bank customers.

Great Depression

The Great Depression had a significant impact on the banking industry. Around 9,000 banks failed during this time.

Many small banks invested their assets in the stock market. When the stock market crashed, panicked bank customers withdrew money to access cash, but the banks didn't have enough cash reserves, so they couldn't maintain business.

Other issues contributed to bank failures, too. A lack of government intervention and insufficient regulation also played an important factor in bank collapses during this period.

Banking customers were negatively impacted during the bank failures because they lost their money if their bank shut down.

Because of the bank failures during the Great Depression, the U.S. created policies to better protect bank customers. The Federal Deposit Insurance Corporation (FDIC) was established in 1933, so it could oversee banks and provide federal insurance for money held in bank accounts.

2008 Financial Crisis

Most bank failures since 2000 are linked to the 2008 financial crisis. Between 2008 and 2015, about 500 bank failures occurred, according to the FDIC.

"The banks had invested in very risky types of investments," said Tom Wheelwright, CPA and CEO of WealthAbility,regarding the bank failures that occurred. "When those derivatives showed that they didn't have value, that's when the banks failed."

Bank customers didn't lose their insured deposits if their bank collapsed. In most instances, the FDIC found banks to acquire all of the deposits, or all excluding certain brokered deposits.

That said, the U.S. government still created new legislation to address some of the issues that caused the 2008 financial crisis. After the Great Recession, the Dodd-Frank Wall Street Reform and Consumer Protection Act became law in 2010.

One of the most notable parts of the Dodd-Frank Act is the Volcker Rule, which prevents banks from owning or investing in certain risky investments (some securities, derivatives, and commodity futures) to get a profit.

2023 bank failures

First Republic Bank, Silicon Valley Bank, and Signature Bank shut down in 2023. There were a total of 5 bank failures that occurred in 2023, but these three were particularly newsworthy because they were some of the biggest bank failures in U.S. history.

Silicon Valley Bank was the first of the three banks to shut down. It invested a large portion of its funds in Treasury and mortgage bonds, and the bank's portfolio lost a lot of value when interest rates rose.

"There was news about that, and some investors — some big depositors — told everybody, 'You need to pull your money out because the bank is failing,'" says Wheelwright.

Too many people tried to withdraw their money at the same time, and the bank became insolvent — its liabilities exceeded its assets. As a result, the California Department of Financial Protection and Innovation shut down Silicon Valley Bank.

Signature Bank and First Republic Bank collapsedfor similar reasons as Silicon Valley Bank. Notably, all three banks had many customers with uninsured deposits.

The FDIC made a system risk exception and protected uninsured deposits for Silicon Valley Bank and Signature Bank to prevent more substantial issues that would affect the entire banking industry. First Republic Bank was quickly acquired by JPMorgan Chase Bank. Any money in First Republic Bank accounts— regardless of the amount — was transferred to Chase Bank.

Government agencies have come together to issue a proposed rule for large banks because of what happened with the Silicon Valley Bank, First Republic Bank, and Signature Bank failures. The proposal states that certain large banks would need to have a certain amount of long-term debt. This would keep large banks dipping into the Deposit Insurance Fund as much and also have the banks take in losses if its shut down.

List of failed banks over the last 5 years

Over the last five years, there have only been 14 bank failures. The following chart provides information on the day these banks were closed, the state where each bank was located, and the institution that acquired the assets of the failed bank. This chart uses FDIC failed bank data, where you can find more information about failed banks.

Causes of bank failures

Some of the main causes of historic bank collapses include insufficient financial management and poor financial health during economic downturns.

Public perception of a financial institution can also impact a bank negatively. Recent examples, like the collapse of Signature Bank, show that customers may start a bank run if they're concerned about their money.

Impact on the economy

The economic impact of banking crises is often negative, especially if a bank run occurs. Bank failures often influence economic growth and employment declines. It can also impact the way that other banks lend to customers. Smaller banks could make it more difficult for customers to borrow money.

Lessons learned from bank failures

Importance of regulatory oversight

The FDIC was created to oversee banks and protect depositors when a bank fails.

The FDIC will become the "receiver" of the failed bank. The FDIC also offers protection against bank failures and losses. It ensures people still get access to their insured deposits, regardless of what happens to a bank.

Role of deposit insurance

The FDIC insures up to $250,000 per depositor per ownership category. (Similarly, the National Credit Union Administration, or NCUA, insures up to $250,000 per depositor, per ownership category for credit unions.) Any money beyond the $250,000 limit is considered uninsured. This means you might not get all your money if a bank shuts down.

What to do if you're worried about banks shutting down

If you're worried about what happens to your money if your bank fails, it's important to remember that money deposited into bank accounts will be safe as long as your financial institution is federally insured. Up to $250,000 is secure in individual bank accounts.

Michael Collins, a business professor at Endicott College, says that from a deposit perspective, the government is going to step in and make sure that people have access to their insured deposits so they won't lose any of their money.

Wheelwright also recommends finding out where your bank is investing money. Financial institutions with more diversified portfolios tend to have more financial stability and are less likely to fail. Some banks may include information about their investments on their websites.

You could also learn about the different types of loans available at a financial institution, or whether it's received designation as a community development financial institution or eco-friendly bank.

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