The History of Bank Closures

Silicon Valley Bank’s recent closure shocked many but bank closures are hardly a modern day phenomenon. They’ve been happening since the beginning.

Larger banks acquire some and others shut their doors because they’re no longer relevant to their customer bases. Sometimes, though, banks are forced to close due to internal mismanagement or economic forces. When that happens, it often sets in motion an interesting chain of events.

Here is the condensed history of the most notable bank closures in the United States:

1811: The First Bank of the United States Lost Its Charter

Secretary of the Treasury Alexander Hamilton founded the First Bank of the United States — a 20-year charter — in 1791. He promoted it as a way to create a stable and reliable currency for the burgeoning nation, and soon the bank was taking deposits and providing loans.

The country was in great upheaval, though. The Revolutionary War left it in debt and disrupted foreign trade. The price of securities plummeted and the bank tightened credit.

Speculators became insolvent, causing what is now known as the Panic of 1792. To quell fear and stabilize the market, Congress passed the Coinage Act to standardize the currency and it established the United States Mint.

It wasn’t enough, however, to save the bank. In 1811, the Jeffersonian Republic Party denied a second charter and the First Bank of the United States closed for good.

[Read: Best Savings Accounts.]

1836: The Second Bank of the United States Lost Its Charter

It wasn’t until 1816 when the Second Bank of the United States — another 20-year charter — came into being.

The bank wasn’t popular with sitting President Andrew Jackson, who believed it was an elitist institution that worked in opposition to America’s values. He withdrew government funds in 1832 and vetoed a bill to recharter the bank.

The Second Bank of the United States didn’t go down willingly and fought the closure in court. Though it won the lawsuit, it closed its doors in 1836 when the charter ran its course.

1837: Hundreds of Banks Dissolved After the Westward Expansion

Just a year later, banking trouble continued for President Jackson. Some 850 regional banks were in operation in the 1830s, accepting deposits and granting loans to consumers and businesses. Thousands of people were pushing westward, buying land as fast as they could — and driving up prices.

Cotton, a primary commodity at the time, lost value and land prices tanked. The Panic of 1837 began and depositors conducted a bank run, demanding their assets. Unable to keep up, banks ran out of gold and silver and stopped redeeming commercial paper at full face value.

Lending screeched to a near halt and a recession followed. As a result, 343 banks closed their doors.

1873: Investment Bank Jay Cooke and Co. Goes Bankrupt

Financial panics continued in the United States and investment bank Jay Cooke and Co. assumed big risks when it invested heavily in railroads and land development projects.

It was early in 1870 and the country was still in an unstable economic position. Moreover, JCC was heavily invested in government bonds and served as a major lender for other banks throughout the U.S.

JCC lost its gamble and declared bankruptcy in 1873. That triggered another wave of bank failures across the country. Because there was no bank deposit insurance yet, depositors lost everything — and the first U.S. economic depression began.

[Read: Best Online Banks.]

1907: Two Speculators Took Down Multiple Banks

The impact two wealthy — and somewhat sketchy — investors had on the country’s banking system was extreme. F. Augustus Heinze and Charles W. Morse acquired stakes in several national banks, then tried to corner the market on United Copper stock.

Rumors ran rampant that the two had attempted to illegally inflate the value of their stocks and customers rushed the banks to withdraw funds. In 1907, Heinze member banks became insolvent.

To avoid more bank runs, the New York Clearing House Association (established in 1853 to simplify the settlement of interbank transactions in New York) provided Heinze member banks enough loans to meet depositors’ withdrawals.

The Heinze banking crisis prompted the Federal Reserve Act of 1913’s passage, which created the Federal Reserve System and a central bank in the U.S. to regulate the economy and prevent financial crises.

1929: A Tidal Wave of Bank Failures After the Stock Market Crash

The Roaring ’20s came to a full stop in 1929. At the time, most banks were invested in the stock market, so when it crashed the value of their holdings plummeted.

Bank runs were swift and dramatic. Hundreds of thousands of customers tried to withdraw their deposits but with no cash to give, the banks bolted their doors.

Approximately 650 banks closed that year and eventually 4,000 more followed suit. Without banks to provide credit, businesses could neither start nor survive. The economy went into a tailspin, bringing about the Great Depression.

In response, the U.S. government created regulations to protect investors and consumers. Among them was the Emergency Banking Act of 1933, which established the Federal Deposit Insurance Corporation to insure bank deposits up to a set figure.

[READ: Will the Stock Market Crash in 2023? 7 Risk Factors]

1980s and 1990s: More Than 1,000 Savings and Loans Closed

After the crash of 1929, new regulations helped settle banking volatility. More trouble was on the horizon, however, in the form of the savings and loan industry crisis.

Similar to banks, S&Ls focus their business on personal and car loans, mortgages and savings accounts. During the 1970s, however, interest rates were volatile and the economy was sluggish. A combination of eased regulations and corruption led to lower lending standards and an overabundance of risk.

Everything seemed to be going fine — at least on the surface — until real estate values took a hit. From the 1980s into the 1990s, more than 1,000 S&Ls folded. While the FDIC protected Americans from losing their insured funds, the disaster cost taxpayers billions of dollars in bailouts.

2008: 25 Banks Failed Due to the Subprime Mortgage Crisis

In the 2000s, another housing bubble emerged. U.S. Banks were issuing mortgages to hopeful homeowners who weren’t entirely creditworthy or financially capable of paying the loans.

Subprime loans enabled people to borrow without putting much or any money down and the loans started with very low interest rates. When the rates increased, however, so did the payments. Borrowers began to fall behind, then default.

Homes lost their values and mortgage holders found themselves owing more than their properties were worth. By 2008 the banks started to foreclose on those homes.

The economic impact was far-reaching. Liquidity across global financial markets contracted — and the Great Recession began.

According to the FDIC, 25 banks failed in 2008. Washington Mutual declared bankruptcy, the largest bank failure in U.S. history, and Wells Fargo acquired Wachovia National Bank.

The disaster prompted Presidents George W. Bush and Barack Obama to enact more protective regulations, including the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The reform aimed to prevent excessive risk-taking of the kind that led to the financial crisis and protect consumers from abusive financial services practices.

2023: Silicon Valley Bank Goes Belly-Up

Silicon Valley Bank opened in 1983 in Santa Clara, California, to serve the rising and highly lucrative technology sector in the area. Its famous depositors included Twitter, Facebook and LinkedIn.

During the COVID-19 pandemic, SVB doubled its deposits. The bank invested heavily in U.S. treasury securities but interest rates increased rapidly, causing their values to decline. Meanwhile, deposits slowed.

Trouble was brewing, so venture capital firms decided to withdraw funds, which started a bank run. Suddenly, everybody wanted to take their money out of SVB but there simply wasn’t enough cash to go around.

While the FDIC insures up to $250,000 worth of deposits, many individuals and companies held far more at the bank. Faced with massive losses and unable to meet payroll and expenses, they began to panic.

On Friday, March 10, 2023, the California Department of Financial Protection and Innovation closed Silicon Valley Bank.

Thankfully, over the weekend the FDIC transferred all SVB deposits and assets into a newly created FDIC-operated “bridge bank,” giving customers full access to their funds and protecting new and existing deposits.

Consumer Takeaways

Even with protective measures in place, banks do fail. It doesn’t happen often but it’s good to know that your money is protected with FDIC insurance. According to the FDIC, that protected amount is “$250,000 per depositor, per insured bank, for each account ownership category.”

So, if you have more assets than that, deposit that money into a different bank. It’s the safe thing to do.

More from U.S. News

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