What's behind the decline in US banks? (2024)

FAQs

Why are the US banks falling? ›

As the Federal Reserve began raising rates in 2022, bond prices declined decreasing the market value of bank capital reserves, leading some banks to sell the bonds at steep losses as yields on new bonds were much higher.

For one, the number of new banks established over the past decade is insufficient to outpace those that have closed, meaning the industry is expected to continue shrinking over time. Obstacles, such as regulatory costs, make it more difficult for small banks to compete against larger institutions.

The most common cause of bank failure is when the value of the bank's assets falls below the market value of the bank's liabilities, which are the bank's obligations to creditors and depositors. This might happen because the bank loses too much on its investments.

While some of this decline was caused by failure, most of it was driven by an unprecedented collapse in new bank entry. The rate of new-bank formation has fallen from an average of about 100 per year since 1990 to an average of about three per year since 2010.

Consulting firm Klaros Group analyzed about 4,000 U.S. banks and found 282 banks face the dual threat of commercial real estate loans and potential losses tied to higher interest rates. The majority of those banks are smaller lenders with less than $10 billion in assets.

JPMorgan Chase, the financial institution that owns Chase Bank, topped our experts' list because it's designated as the world's most systemically important bank on the 2023 G-SIB list. This designation means it has the highest loss absorbency requirements of any bank, providing more protection against financial crisis.

Consulting firm Klaros Group analyzed about 4,000 U.S. banks and found 282 banks face the dual threat of commercial real estate loans and potential losses tied to higher interest rates.

The news: Last Friday, Pennsylvania financial regulators seized and shut down Philadelphia-based Republic First Bank in the first FDIC-insured bank failure of 2024.

There have already been 200 closures scheduled for the rest of 2024, including 50 from NatWest, 43 from Lloyds, 28 from TSB, 26 from Halifax, 20 from Royal Bank of Scotland and 14 from Barclays. The number of lost branches is equal to 60% of the national network in place nine years ago.

Bottom line. For the most part, if you keep your money at an institution that's FDIC-insured, your money is safe — at least up to $250,000 in accounts at the failing institution. You're guaranteed that $250,000, and if the bank is acquired, even amounts over the limit may be smoothly transferred to the new bank.

How many US banks are in danger? ›

A report posted on the Social Science Research Network found that 186 banks in the United States are at risk of failure or collapse due to rising interest rates and a high proportion of uninsured deposits.

When banks fail, the most common outcome is that another bank takes over the assets and your accounts are simply transferred over. If not, the FDIC will pay you out. Funds beyond the protected amount may still be reimbursed, but the FDIC does not guarantee this.

Funding costs and declining income weakened profitability in the second quarter. Banks have lost deposits for the past five quarters, as more folks tap into their savings. Banks are still using the Federal Reserve's emergency lending programs.

Generally, credit unions are viewed as safer than banks, although deposits at both types of financial institutions are usually insured at the same dollar amounts. The FDIC insures deposits at most banks, and the NCUA insures deposits at most credit unions.

When a bank fails, the FDIC or a state regulatory agency takes over and either sells or dissolves the bank. Most banks in the US are insured by the FDIC, which provides coverage up to $250,000 per depositor, per FDIC bank, per ownership category.

Following the acute stress triggered by the collapse of SVB, aggregate financial indicators of the group have shown improvements. Between March 2023 and January 31, 2024, deposit outflows stabilized, and the KBW Regional Bank Equity Index rebounded. However, vulnerabilities in the US banking sector persist.