Urgency is a tyrant. 

Especially when things go awry related to your money. You’re motivated to defend it with an iron grip … even at the expense of your overall state of mind.

That’s how the banking “crisis” has a lot of people feeling right now. 

If you’re losing your cool because you don’t know exactly how all of the recent banking news will affect your own finances, I want to help give you a clearer picture of this whole situation today. This way, you can take a deep breath and start making the right decisions for you. 

And while there is some uncertainty in the banking world right now (and the economy in general, including what it means for a possible recession), don’t let that tyranny of the urgent fan your anxiety into a wildfire that leads you into unwise decisions.

What you decide to do with your money should be the result of careful, rational thought, as well as guidance from Research Triangle professionals you can trust who know what they’re talking about. 

Now, I’m not a financial advisor, but what I am for you here and now is someone on your team who is ready to help you. Especially for tax decisions, but also more.

On the note of making wise tax moves, that’s a conversation we can certainly have right now. If you want to talk your personal situation over, get some insight on the best tax decisions to make with your money, especially in light of the bank failures, let’s get something scheduled:
calendly.com/bbarton_accountant 

And also, let’s peer into the banking failures of late and try to get some clarity on what it means for you.

(Oh… and be advised: We’ll do a follow-up to today’s article next week.)

Bank Failure Lessons Research Triangle People Should Learn
“We’re still in business! We’ve still got two bucks left!” – George Bailey, “It’s a Wonderful Life”

Silicon Valley Bank. Signature Bank. First Republic Bank. Whoever is next… 

It seems it just keeps snowballing.

Let me ask you this: What is a bank failure the end of? Or perhaps more importantly: What are bank failures the beginning of?

Bank busts have been more common in American history than we tend to remember. Because it’s such a major headline right now (and is tangibly affecting some businesses), I want to look with you at how this potential crisis gives an overview of past failures — and how, because they happened, your money now has some protections. 

Let’s take a quick overview of it right now. Next week, we’ll dive into how to practically protect your money during this time.

It’s nothing new

Did you get your money out of the Farmer’s Exchange Bank in Rhode Island? Might be hard to recall, since that bank failed more than 200 years ago. How’d your savings do in the Bank Panic of 1819? Or in the panic of 1837, when almost half the banks in the whole country failed?… 

Bank sinkings often crop up as signs of wider economic distress (such as the recession that started in 1837) or changing world conditions (the end of the Napoleonic Wars shortly before 1819). The intertwining of finances in our modern world is nothing new, either: In 1819, one of our country’s first federal banks had to cut credit to state-chartered banks, leading to the collapse of many of them when depositors made “runs” to withdraw all their money at once.

A little timeline

Speculation is one money strategy that can end a bank. 

For example: By 1873, railroads were supposed to be the can’t-miss moneymakers. Of course, they missed — every investment does, sooner or later — and banks heavily invested in railroad bonds began to go belly-up, leading to what everyone called the “Great Depression,” at least for about 60 years (until it got renamed the “Long Depression”). 

In the early 1900s, it was copper that gleamed for two speculators, F. Augustus Heinze and Charles W. Morse. Their investment tanked. Unfortunately, they were associated with a web of banks that swiftly suffered depositor runs. Credit was offered to the banks to check the runs, but the problem spread across trust companies and eventually to financial institutions based in New York. 

Many now say those trust companies resembled our current “shadow banks,” which we’ll discuss later. (With banking troubles, everything old is new again.) About the best thing you can say about this copper mess is that steps taken to solve it gave birth to some of the tools and philosophies used by the Federal Reserve today. 

Now we come to one of speculation’s finest hours: “Black Tuesday,” October 29, 1929, when the greed and guesswork that had inflamed Wall Street through the “Roaring Twenties” joined rising unemployment and shady financial reporting (once again, everything old …) to make one humongous crash. 

It spread through the banking system well into 1933, when President Franklin Roosevelt ordered a “holiday” in which all banks had to cease operations until they could show solvency. Still, about 9,000 banks went under through the 1930s. “Some of our bankers had shown themselves either incompetent or dishonest in their handling of the people’s funds,” Roosevelt said. 

So… where could the little guy turn against the ill winds of banking? 

The Federal Deposit Insurance Corporation. You still see its initials (FDIC) on brassy signs near a teller’s window. Created in 1933, the FDIC continues to guarantee at least some of your money, covering traditional bank deposit products like checking and savings, certificates of deposit, money markets, and other accounts. You’re generally protected up to a quarter mil per FDIC-insured bank. 

The FDIC claims that no depositor in an insured bank has lost the covered amount in 90 years.  

Modern times

Since then, there have still been a few crises. (Chances are, you’re more familiar with these ones.)

  • The Savings and Loan crisis began right after the rampant inflation of the 1970s and intensified regulation. More than 1,000 crashed through the 1980s. 
  • In 2008, the worst downturn since the (second) Great Depression was ignited by the failure of investment banks Bear Stearns and Lehman Brothers, fueled by runaway speculation — there’s that word again — in the housing markets. Regulation cropped up in the aftermath to make sure banks “too big to fail” had sufficient capital. (Those regulations have since been scaled back.) This period featured the biggest bank failure in U.S. history: Washington Mutual.
  • Regional banks have taken recent Fed interest rate hikes — done to corral suddenly high inflation — on the chin. Silicon Valley Bank, for instance, had invested in bonds with values vulnerable to inflation. A run by tech depositors meant that SVB suddenly had to sell at a loss, which only fed the run. SVB failed in March, followed soon by Signature Bank and First Republic Bank. 

Who’s next?

Who knows? Emergencies rarely occur when you expect them. (For example, bank failures eased during the pandemic. Who would’ve thought?) But because of these and other historical events with our banks, there are ways to protect your money as this crisis plays out. 

 

We’ll look at some of those next time. I wanted to first calm the waters a little by showing you that this isn’t the first time our country has seen a bank bust. Of course, I want to help you take steps to protect your money — but let’s do it wisely and thoughtfully, not rashly and urgently. That’s what your trusted Research Triangle tax professional is here for.

Looking out for you

William Barton