With multiple US regional banks failing in the last two years, and more on the horizon, it’s important to understand how this happened. On today’s show, we’re going to talk about the context surrounding bank collapses.
Most importantly, you’ll learn how to protect yourself from more impending bank collapses in 2025 and beyond. Click play on this episode of Investing in Real Estate to learn more!
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In 2023, as the Fed raised the benchmark rate to counter inflation, the value of bonds plummeted. And for banks that held a large portion of bonds in their portfolio, that meant big trouble. Essentially, the price of the bonds they were holding rapidly decreased in value, and they had to sell them off – at a loss of $1.8 billion dollars.
Then of course, their customer base panicked and there was a mass withdrawal. And while Silicon Valley Bank is the most memorable case study, they weren’t the only ones faced with this problem. Soon after more banks collapsed, leading to a total of five bank failures in 2023 in two in 2024.
All of this combined marked one of the largest banking system failures since 2008. Rightfully so, more and more people are scared to keep large amounts of money in the traditional bank system.
There’s very little incentive for people to keep large amounts in the bank. In early 2023, FDIC’s quarterly report showed that US banks had their biggest decline in deposits ever, since they started reporting in the mid 80s. As you know, banks rely on deposits to keep their businesses afloat, so this is a big issue.
When banks don’t have deposits rolling in, they have very few options for funding, including a heavy reliance on the Federal Reserve Banks.
We’re still seeing this deposit issue, and banks are already especially vulnerable in this environment because of continued high rates and commercial loan losses. People are not going back to their cubicles, so there’s no need for most of these office spaces across the country. And unfortunately, a lot of the smaller banks are the ones feeling the pressure. Many will go under moving forward – and I wouldn’t be surprised if it’s worse than what we saw in 2023.
This is not an exaggeration – Jerome Powell addressed that bank failures are basically unavoidable at this point.
As you can see, these collapses tend to impact smaller banks, and especially those that are not well diversified. Many banks today tend to have losses in both their assets and liabilities. At the rate things are going, there are a lot of banks that just won’t be able to sustain any sort of profitability.
Because of this, many banks have no choice but to implement job cuts. Financial Times reported that banks laid of 60,000 employees last year alone.
There’s no reason why we should expect anything different this year than what we saw in 2023 and 2024. Like I said, it will probably be even worse.
That’s why it’s always smart to be thinking about ways to protect your money and your future. Widespread panic can cause bank runs, so that’s not what I’m saying you should do. But please make sure any funds you have sitting in a bank are insured by the FDIC (or NCUA if you use a credit union). You never want to have more than $250,000 sitting in the bank.
As always, the best way to mitigate risk is to be diversified. Start looking for ways to build wealth outside of the US banking system. If you’d like to learn more about this, I have a video you’ve got to watch next – it’s all about the best investments you can make.
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